An FHA loan is a mortgage insured by the Federal Housing Administration, and they have become increasingly important with the collapse of the housing bubble. FHA borrowers pay for mortgage insurance, thus protecting the lender from a loss if the borrower defaults. Because of the insurance, lenders are able to offer the loans with attractive interest rates and more flexible qualification requirements.
1. Less-Than-Perfect Credit is Okay: The FHA doesn’t mandate a minimum credit score and instead borrower’s scores are considered in context. Lenders can, however, put their own requirements on the loans such as a minimum credit score.
2. Minimum Payment is Down 3.5%: The FHA requires a down payment of just 3.5% of the purchase price of the home, a fraction of what is required on most other loans.
3. Closing Costs May Be Covered: The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs. With the payment of closing costs, however, there may be a higher interest rate on the loan. Borrowers can use the “good faith estimate” (the GFE) to compare interest rates and closing costs on different loans to figure out which option makes the most sense.
4. Lenders Must Be FHA-Approved: Because the FHA is not a lender, borrowers must get the loan through an FHA-approved lender.
5. Mortgage Insurance is a Must: Two mortgage premiums are required on all FHA loans: the upfront premium is 2.25% of the loan amount, and the annual premium is .55% of the loan amount. The upfront amount must be paied when the borrower gets the loan but can be financed as part of the loan amount.
6. Extra Cash Available for Repair: The FHA has a loan available for borrowers who need extra cash to make home repairs. Known as the 203(k), the loan amount is based on the projected value after the repairs are completed, not on the current appraised value of the home.
7. Financial Hardship Relief Allowed: Loan servicers can offer some relief to borrowers who have an FHA-approved loan and have suffered a serious financial hardship.