FHA Loans
Federal Housing Administration
Definition of FHA Mortgages -
During the great depression in 1934 Congress created the Federal Housing Administration (FHA). In a time of struggle the Government came out with this program to make it easier for Americans to buy a home and boost the economy. This loan program is insured by the FHA, but will let private lenders and banks originate the loan. An FHA loan is a great way to get into homeownership, but it’s not the best long term option for a loan.
Qualifications:
Lower Credit Score Requirements – as low as 580
Strict Government Code Requirements – peeling paint, smoke and carbon monoxide alarms.
No income limits programs
3.50% of the purchase price for a down payment (1-4 unit properties). One of my favorite house hacks is a FHA 3.50% down payment on a quad plex (4 units).
Mortgage Insurance –
With a FHA Loan there are two ways you’ll be required to pay mortgage insurance.
1.
Upfront Mortgage Insurance Premium – this is 1.75% of the loan you’ll need to buy the home. This is rolled into the financing so you don’t have to pay this upfront unless you wanted to, but it does collect interest. This is immensely expensive in my opinion. For example, on a $300,000 loan you’ll pay an extra $5,250 for this that you’ll never get back.
2.
Monthly Mortgage Insurance – on top of the UFMIP you’ll have to pay a .55% monthly premium if you put the minimum 3.50% down payment. If you put 5% or more it is .5%.
Unlike a Conventional loan where the monthly mortgage insurance will stop once you have 20% equity in the home FHA MIP will continue for the life of the loan. The Monthly home insurance potentially could be there for the full 30 years!
In exchange for paying higher mortgage insurance, interest rates on a FHA loan are significantly lower than a Conventional loan. If you have a lower credit score (typically <680) the FHA is going to be the best option for you, but by working on your credit and getting into a Conventional loan when buying a home will put you in a better long term situation.
If you are wanting to buy a home and don’t have the credit to get into a Conventional loan, FHA may be the way to become a homeowner. In my opinion, it’s better than renting! Once you make a few years of payments and let your home appreciate a bit more you’ll have the chance to refinance into a Conventional loan and hopefully drop the mortgage insurance!
Have Questions?
Read our other blog posts or reach out to us directly.
Benson Ringle
Loan Officer NMLS #1516626
GA Lic. # 1516626
(218) 507-0429
Benson.Ringle@supremelending.com
