In a nutshell, FHA Loans are designed to assist low- to moderate-income borrowers and home buyers. Issued by FHA-approved lenders, these loans are backed and insured by the Federal Housing Administration (FHA), so they pose less risk to lenders. Typically, then, FHA Loans require lower down payments and lower credit scores than conventional mortgages. Still, it’s a little more complicated than that, so here are FHA Loans explained for Concord home buyers.
FHA Loans Explained Quickly
Here’s how one top real estate site explains the genesis of FHA Loans:
“The FHA program was created in response to the rash of foreclosures and defaults that happened in the 1930s, to provide mortgage lenders with adequate insurance and to help stimulate the housing market by making loans accessible and affordable for people with less than stellar credit or a low down payment.” What this means is that the federal government insures these loans for approved lenders “in order to reduce their risk of loss if a borrower defaults on their mortgage payments.”
According to 2019 regulations, with FHA loan homebuyers can borrow up to 96.5% of a home’s value – which means a down payment of only 3.5%. Typically, borrowers need a minimum credit score of 580. But those with credit scores of between 500 and 579 are still eligible if they can come up with a 10% down payment. “With FHA loans your down payment can come from savings, a financial gift from a family member or a grant for down-payment assistance.”
Benefits of FHA Loans
Of course, our treatment of FHA Loans explained for Concord home buyers would be incomplete without a run-down of the benefits, such as:
- FHA Loans are usually the easiest of mortgage loans to qualify for owing to lower down-payment and credit score requirements.
- Borrowers who can’t come up with the standard 20% down payment and who have a credit score as low as 500 can qualify.
- An FHA Loan is also an assumable mortgage. That means that if you want to sell your home, the buyer can “assume” (or take over) your mortgage. This is a huge benefit for people with poor credit or who have gone through bankruptcy or foreclosure.
The Workings of FHA Loans
In this part of FHA Loans explained, you need to keep in mind that the FHA doesn’t actually lend the money. Rather, you will get your mortgage loan from an FHA-approved lender such as a bank. The FHA’s role is simply to guarantees the loan to reduce the approved lender’s risk. And that also means that you, as the borrower, will have to pay mortgage insurance premiums to the FHA so that the FHA can make that guarantee to the lender.
Typically, you will have to pay for two kinds of mortgage insurance: 1) an Upfront Mortgage Insurance Premium (UFMIP) and 2) an Annual Mortgage Insurance Premium (MIP) for which you will make monthly payments. Generally, the UFMIP runs 1.75% of the base loan amount. You will pay this at closing, or it can be bundled into the loan amount. This payment is deposited into an escrow account and held there in case you default.
Your monthly Annual MIP payments typically amount to about 0.45% to 1.05% of the base loan amount, depending on the size and length of the loan, as well as the loan-to-value ratio. The most common cost for this is 0.85% of the base loan amount. You will usually make these monthly payments for either 11 years or the entire life of the loan, again, depending on the length of the loan and the loan-to-value ratio.
Work and Payment History for FHA Loans
As part of FHA Loans explained for Concord home buyers, we also need to make you aware that although lower down payments and credit scores are required, lenders will still scrutinize your work and payment history. Lenders, for example, will examine your past two years’ work history, as well as your history of paying utilities and rent on time.
In addition, buying a home – even with an FHA Loan – means that you will likely be responsible for a number of out-of-pocket expenses, for example, appraisal and inspections costs, attorney fees, and loan origination fees. The good news is that with an FHA Loan, according to financial experts, the seller, the lender, or even the home builder can assume some of these costs. They may be willing to sweeten the deal in this way in order to have a buyer and close the deal.
Consult a Local Real Estate Professional
So if you have little money for a down payment or not-so-great credit, you very well may be able to purchase a home with an FHA Loan. Still, FHA Loans explained for Concord home buyers must contain the caveat that you need to make sure it’s right for you. You will, after all, have to pay that extra mortgage insurance.