FHA Mortgage

There are lots of good reasons to choose an FHA loan, especially if one or more of the following apply to you:

• You're a first-time homebuyer
• You don't have a lot of money to put down on a house
• You want to keep your monthly payments as low as possible
• You're worried about your monthly payments going up
• You're worried about qualifying for a loan
• You don't have perfect credit
• You're worried about what will happen if you fall behind on your payments

If any of these things describe you, then an FHA loan may be right for you. Why? FHA-insured loans offer many benefits and protections that you won't find in other loans including:

• Lower cost: FHA loans have competitive interest rates because the Federal government insures the loans for lenders. Always compare an FHA loan with other loan types.
• Smaller down payment: FHA loans have a low 3.5% down payment and the money can come from a family member, employer or State Funded Down Payment Program as a gift. Other loan programs don't allow this.
• Easier qualification: Because FHA insures your mortgage, lenders may be more willing to give you loan terms that make it easier for you to qualify.
• Less than perfect credit: You don't have to have perfect credit to get an FHA mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it's easier for you to qualify for an FHA loan than a conventional loan.
• More protection to keep your home: The FHA has been around since 1934 and will continue to be here to protect you. Should you encounter hard times after buying your home, the FHA has many options to help you keep you in your home and avoid foreclosure.
• The FHA does not give money to people for a home and it does not set the interest rates on mortgages it insures. FHA insures loans for lenders against defaults. For the best interest rate and terms on a mortgage, you should compare mortgages from several different lenders. An FHA-approved lender can help you start the loan application process.
• You may use an FHA-insured mortgage to purchase or refinance a new or existing 1-4 family home, a condominium unit or a manufactured or mobile home (provided it is on a permanent foundation).

What kinds of loans does FHA offer? - Fixed rate loans - Most FHA loans are fixed-rate mortgages (loans). In a fixed rate mortgage, your interest rate stays the same during the whole loan period, normally 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your monthly payment will be, and you can plan for it.

Adjustable rate loans - Most first-time homebuyers are a little stretched financially, so they want payments as low as possible at the beginning. With FHA's adjustable rate mortgage (ARM), the initial interest rate and monthly payments are low, but these may change during the life of the loan. FHA uses the 1-Year Constant Maturity Treasury Index (1 Yr CMT the most widely used index, to calculate the changes in interest rates. An index is a measure of interest rate changes that determine how much the interest rate on an ARM will change over time.

The maximum amount that the interest rate on your loan may increase or decrease in any one year is 1 or 2 percentage points, depending upon the type of ARM you choose. Over the life of the loan, the maximum interest rate change is 5 or 6 percentage points from the initial rate, again depending upon the type of ARM you choose. The advantage of an ARM is that you may be able to afford more house because your initial interest rate will be lower, as will your payment.

Purchase/rehabilitation loans - Sometimes you might see a home you'd like to buy, but it needs a lot of work. FHA has a loan for rehabilitating and repairing single-family properties called the SF Rehabilitation Loan program (203k). You can get just one mortgage loan which includes the mortgage and the cost of repairs combined. The mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. The advantage of this loan is that you can buy a home that needs a lot of work, but you still have only one mortgage payment, and you can complete the repairs after buying the home.

Indian Reservations and Other Restricted Lands - A family who purchases a home under this program can apply for financing through a FHA approved lending institution such as a bank, savings and loan, or a mortgage company. To qualify, the borrower must meet standard FHA credit qualifications. An eligible borrower can receive approximately 97% financing. An eligible party can produce a gift for the down payment. Closing cost can be financed; covered by a gift, grant or secondary financing; or paid by the seller without reduction in value.

How do FHA loans compare to conventional loans? Conventional loans usually require a larger down payment. And, if you have less than perfect credit you may not qualify for many conventional loans and find yourself being offered loans with higher interest rates and/or fees than you expected. The best thing to do is compare the cost of the conventional loan to an FHA loan line-by-line. What are the fees on each? What is the interest rate? How much is the mortgage insurance on each? How much down payment is required? For some borrowers, a conventional loan may be less expensive. For many others, it will be more expensive than FHA.

Do you have to buy mortgage insurance on an FHA loan? Yes - as you will with most all of them. FHA has made changes to their loan programs for 2009, increasing their required down payment as well as mortgage insurance amounts.

In Mortgagee Letter 8-23, FHA increased their downpayment requirements to 3.5% from 2.25%.

FHA loans carry mortgage insurance known as MIP, which protects the lender against default by the homeowner. The borrower pays for this insurance in two ways: with a financed sum that is added onto the base loan amount, as well as a monthly premium which will eventually drop off when the loan has been paid down to 80% of the original price.

Effective on all case numbers issued on or after April 5, 2010, HUD will increase the upfront mortgage insurance premium for FHA loans from the current rate of 1.75% to 2.25%.

The increase in upfront MIP premiums is due to FHA falling below the required 2% level of reserves in order to operate. When reserves fall, the deficit has to be made up in some way.

The increase in premiums will equate to a $500 increase for every $100,000 in loan amount. A $200,000 loan will see an increase of $1,000 in upfront premium.

WILL MONTHLY FHA MIP PREMIUMS ALSO INCREASE?

NO, not at this time. The following premiums will remain in force for FHA loans:

LOAN TERMS GREATER THAN 15 YEARS (20, 25 and 30 year terms):

For loans with a loan to value ratio LESS THAN OR EQUAL TO 95%, the monthly premium is .5% of the initial loan amount, divided by 12. For a $100,000 loan, this works out to be $41.66 per month.

For loans with a loan to value ratio GREATER THAN 95%, the monthly premium is .55% of the initial loan amount, divided by 12. For a $100,000 loan, this works out to be $45.83 per month.

LOAN TERMS OF 15 YEARS OR LESS:

For loans with a loan to value ratio GREATER THAN 90%, the monthly premium is .25% of the initial loan amount, divided by 12. For a $100,000 loan, this works out to be $20.83 per month.

For loans with a loan to value ratio of LESS THAN OR EQUAL TO 90%, FHA does not require monthly mortgage insurance.

Most loans require mortgage insurance when your down payment is less than 20% of the sales price. On conventional loans, mortgage insurance is provided by private companies. Whether private mortgage insurance is less than, equal to, or more than FHA loan insurance will depend upon the loan program and your qualifications.

Compare the cost of FHA over the life of your loan and how much it costs monthly to subprime and conventional types of loans. With the protection you get with FHA - it's a very good deal.