FHA Pros & Cons
FHA loans are a big buzz in the mortgage industry today. In actuality they have been around and available for years. FHA loans lost their luster and their popularity declined during the recent surge in sub-prime lending. Now that the sub-prime loan industry is virtually non existent many loan officers, and consumers are looking again at FHA loans. FHA stands for Federal Housing Administration. They are a division of Department of Housing and Urban Development. FHA began in 1934 and has been self funded since inception. FHA is the only government agency that does not take proceeds from tax payers. They are called FHA loans even though FHA does not do loans, they only insure loans. That means the lender (who does the loan) has in insurance policy provided by FHA against losses should the borrower default. There is a cost for this insurance and that is how the agency remains self-funded. They charge the borrower an up front mortgage premium that is based on a percentage of the loan amount and also a monthly mortgage premium that is also a percentage based on the mortgage amount. These insurance premiums are the revenue that FHA operates on.
Why an FHA loan? There are many benefits and very few drawbacks to a FHA loan. I will begin with the drawbacks since it will be quick then move onto the benefits. The only real drawback is the mortgage insurance, more specifically the up front mortgage insurance. Now you can’t have terrible credit and you have to prove your income with paycheck stubs and tax returns, but that is the same requirement as most loans these days. This up front mortgage insurance is financed into the loan amount so it is not a large amount that the borrower has to come up with to purchase the house and it does not even increase the monthly payment by very much. So although I have to name it as a draw back, in my options it is a minor drawback, especially looking at the many positives.
Now let’s move onto the many positive features of FHA loan programs. The first and probably most important benefit to an FHA loan is the down payment, or shall I as small down payment. Since the lender has the benefit of the FHA insurance they will allow a very low down payment. As of this writing in early 2009 that down payment is only 3.5% of the purchase price of the home. For those of you our there that own a home and a considering refinancing your home, FHA will allow loans up to 97% of your homes current value. I will continue with the benefits of using these loans. they allow more liberally underwriting criteria than a conventional loan. this means that more people can qualify for FHA loans and it is much easier to qualify. FHA does not have minimum credit score requirements. Now like I stated above, you cannot have horrible credit but if you have decent credit and can explain any negative items, you can get FHA financing. They offer low interest rates. FHA interest rates are low, this is again due to the fact they have the FHA insurance, they trade well in the secondary mortgage market so the rates remain low. I do not want to go into detail on the rates in this blog so I will leave it at that. When purchasing a home they allow large seller contributions towards closing costs. With a FHA loan the seller is allowed to contribute up to 6% of the sales price to help the buyer with closing costs. Allowing the seller to contribute towards the closing costs lowers the amount on money the buyer has to have to purchase the home Are you beginning to see a trend developing? FHA wants to enable home ownership so they try to make it as easy as possible. If that were not enough benefits they will also allow a family member to gift the down payment to the buyer and also allow family to co-sing to help buyers in the qualification process.
I hope I have made the point clear-FHA loans are great loans and help buyers, buy homes. If you have any questions regarding purchasing a home with a FHA loan please feel free to contract me.