by Gilly Brewster
(Los Angeles, California, USA)
An FHA loan (Federal Housing Association) may be the only way many people can qualify to buy a home in today’s tough mortgage environment. Although interest rates are hovering at record low levels, lenders have tightened their guidelines to the point where many borrowers who were once considered top lending prospects for conventional loans now don’t even qualify for a mortgage without putting 25% to 30% of the purchase into a down payment.
Because of the difficulty qualifying for a conventional loan, more prospective homebuyers than ever are checking into how to use an FHA loan to buy a home. Because the FHA loan insurance program is traditionally thought of as a program to help first time buyers and others who can’t afford to pay a large down payment, many people believe that FHA loans are only available to people with low incomes. In fact, FHA does not have any income restrictions! There are loanamount restrictions in place, but the FHA loan limits are high enough that very few homes are excluded from qualifying.
The key feature attracting most people who are considering using an FHA loan to buy a home is the low down payment requirement. FHA requires only 3.5% of the purchase price as a down payment. So those potential homebuyers who once regularly qualified for conventional loans using 5% or 10% down payments but have now been frozen out of the market can still qualify.
The FHA program does require two different types of mortgage insurance. Those are the upfront mortgage insurance premium (UFMIP), which is usually added to the base loan amount and the annual insurance premium which is divided among each of the 12 payments due each year.
The premiums on these two types of mortgage insurance will differ slightly depending upon how much the buyer puts down at closing and the term of the loan. Because conventional private mortgage insurance has become more expensive, or in some cases not available, FHA loans are often less expensive these days even when a conventional loan option is available.
Many people are afraid of the FHA loan process because they believe that there is a lot more paperwork required and much more restrictive property inspections involved. At one time FHA was slightly more restrictive and did involve a few more sheets of paper, but this is no longer the case. The FHA loan process is now very streamlined and a good loan officer can guide buyers through the process very easily.
The FHA mortgage insurance program guarantees lenders that theloan will be paid off if the borrower defaults as long as the lender follows FHA guidelines when underwriting the loan.
This means that the lender is taking much less risk than would be without this insurance and allows them to be much more flexible in approving the loans. Thus the FHA loan has swiftly moved to the top of the list of choices for today’s prospective home buyers.