FHA Loan Basics
FHA loans offer the following benefits over conventional loans:
- low down payments. In general, the cost to the home buyer is approximately 0.75% to 1% less than conventional financing, meaning that they will need $1,500 to $2,000 less upfront to purchase a $200,000 home;
- low closing costs. Closing costs are miscellaneous fees charged by those involved with the home sale, such as the surveyor, home inspector, the lender (for processing the loan), and the title company (for handling the paperwork). To get the most value for their dollar during closing, homeowners should make sure to hire only InterNACHI inspectors;
- an easier time qualifying for credit, which is especially important for borrowers with no credit (although someone with poor credit will probably be ineligible for an FHA loan);
- a greater ability to use “gifts” for the down payment. Most conventional lenders require the home buyer to pay a percentage of the loan's cost from their own personal funds, while FHA loans may be gifted from family or friends;
- no pre-payment penalty, which is a big plus for subprime borrowers;
- a loan which may be assumable. Assumable loan obligations may be transferred to a qualified purchaser without the lender’s permission. Ideally, such loans are purchased during a period of low interest rates and sold later when these rates are higher. Veterans Administration loans also may be assumable, but conventional loans generally are not;
- possible leniency or loan deferment during financial hard times; and
- funding for home improvement through FHA 203k Programs.
How does a home buyer get an FHA loan?
Home buyers who wish to obtain FHA loans need to contact several lenders and ask them if they make FHA-backed loans. Bear in mind that each lender sets its own terms and rates, so comparison-shopping is critical. Next, the lender assesses the borrower for risk by examining their income level, debt-to-income ratio, credit repayment history, and expenses. Certain other factors are also considered, such as how the property will be used, how many units are on the property, and whether the borrower will actually live in the home. Note that prospective homeowners may be denied an FHA loan if they plan to rent the property out to others and not live in it themselves.
lower loan amounts. FHA home loans have lower limits than what may be needed to buy the home of one's dreams. Loans borrowed under Fannie Mae or Freddie Mac, for instance, have much higher limits than FHA loans;
limited options. FHA loans were constructed to serve a particular segment of buyers, so the loans come with few variations. These more conservative loans are designed to limit lender losses; and
an upfront mortgage insurance premium (UFMIP) equal to 1.5% of the base mortgage amount.