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The Basics Of FHA Loans

So let's talk about the basics of FHA loans. While the Federal Housing Administration has been around 80 years, loans secured by the FHA have become much more ubiquitous over the past half a dozen years or so. This is largely due to the fact that, ever since the systematic elimination of sub-prime mortgages, an FHA-insured loan is a great option for those individuals who might not fit the rather strict underwriting criteria found on prime (AKA A Paper) loans. Here are some of the pros and cons of these types of loans

Pros:

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  1. FHA loans don't require that you have a ton of equity in the property. On a purchase transaction, you can finance up to 96.5% of the purchase price (in other words, 3.5% down). On a refinance transaction you can finance up to 97.75% of the value of the property
  2. FHA loans don't require you to have perfect credit scores. In fact, under certain circumstances an FHA-insured loan can be obtained with a credit score as low as 600
  3. The debt-to-income ratio on these programs is far more flexible than what you'd find in the A Paper world
  4. The rates are usually comparable (and often times lower) than what you'd find on an A Paper, conventional conforming loan

Not bad, right? Well, let's now proceed to the cons

Cons:

  1. ALL FHA loans require monthly mortgage insurance (similar to PMI). On a conforming, A Paper loan you generally only need mortgage insurance if you're financing more than 80% of the value of the property on one loan. Not so with FHA loans. This mortgage insurance can be rather costly. The dollar amount will depend on the loan size and what percentage of the value of the property that you're financing
  2. ALL FHA loans require an upfront funding fee (also called the Up Front Mortgage Insurance Premium or UFMIP). This will generally be equal to 1.75% of the loan size. In other words, a $200K FHA loan will require the borrower to pay a funding fee of $3500. This can usually be financed into the loan itself
  3. You can only use an FHA loan on an owner occupied property (i.e., primary residence), so no second homes or investment properties

So the logic behind these loans is pretty simple; the FHA will insure loans given to borrowers whose credit profile may be deemed too risky for conventional, A Paper products. In order to compensate for this risk they shoulder, they require both the monthly mortgage insurance as well as the FHA funding fee to be paid by the borrower.

It also needs to be stated that the FHA doesn't issue mortgages, they simply insure them. What that means is that if you want to obtain an FHA loan, don't bother contacting the FHA. Youd have to contact a lending institution directly. They would write/issue the loan that would be insured by the FHA.

As I'm sure you realized, this posting is just supposed to highlight some of the prominent aspects of this type of loan. As such, it's not intended to be all inclusive, so if you have additional questions regarding program details or your ability to qualify, you can contact a local lending institution or myself.

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Posted in Financial Services Post Date 03/31/2018


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