The U.S. Federal Housing Administration (FHA) provides mortgage insurance for approved lenders that issue home loans. According to the U.S. Department of Housing and Urban Development, the FHA is “the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.” FHA loans are an especially attractive choice for first-time home buyers, but they have much to offer experienced homebuyers, too. The credit requirements for FHA loans are more liberal than requirements are for conventional loans, so FHA mortgages are relatively accessible. And, with low down-payment requirements and a seller-assist option that allows buyers to finance some or all of their closing costs, FHA loans put home ownership within reach of creditworthy borrowers who are short on cash.
1. Buyer must meet credit requirements. While buyers must meet minimum credit standards in order to qualify for an FHA mortgage, there is no minimum credit score requirement. Rather, lenders take into account the big picture, with housing and installment credit histories among the most heavily weighted factors.
2. Up to 96.5 percent of the purchase price may be financed. Future regulations may increase the minimum down payment to 10 percent of the purchase price for borrowers with credit scores below 580. However, current regulations, which apply to all FHA borrowers, require 3.5 percent down.
3. Up To 6 percent of closing costs may be financed. For many would-be homeowners, loan origination fees, transfer taxes, property tax and insurance escrows and other closing costs pose barriers to purchasing a home. Seller assist allows borrowers to finance up to 6 percent of these costs, with the seller’s permission. Although the seller is not actually paying out of pocket, his net profit is reduced by the amount of the concession.
4. Borrower must pay mortgage insurance. The FHA charges borrowers a mortgage insurance premium (MIP) to cover the cost of insuring their loans. The upfront premium, which is paid at closing, can be financed or paid in cash. Subsequently, an annual premium is charged. The FHA notes “the annual premium is based on the loan term and loan-to-value (LTV) at origination.”
5. Home must fall within maximum price limit. The FHA sets caps on the purchase prices of homes financed with loans it insures. The maximum price varies from location to location.
6. Home must be safe and sound. FHA appraisers both value homes to be purchased with FHA loans and inspect them to ensure they meet minimum standards of safety and soundness. The appraisal guidelines are quite extensive. They cover structural integrity as well as home systems like electric and plumbing. If the appraiser concludes the home falls short, the appropriate repairs and/or improvements must be made in order for the loan to be issued.
U.S. Department of Housing and Urban Development
Federal Housing Administration