Federal Housing Administration (FHA) Loans

Federal Housing Administration (FHA) mortgages, which are offered by private lenders, resemble conventional mortgages in many ways, but there are some significant differences.

An FHA mortgage is government insured, so lenders are protected against default. That insurance, for which borrowers pay a mortgage insurance premium, encourages qualifying lenders to make FHA loans.

The buyer's closing costs are limited and the required down payment is lower. There is a price ceiling on the amount a homebuyer can borrow with an FHA mortgage, based on the state and county where the property is located.

Furthermore, people who may not qualify for a conventional mortgage because of previous credit problems may qualify for an FHA loan.

These mortgages are assumable, which means a new buyer can take over the payments without having to secure a new loan.

Beneficial Features of FHA Loans:

  • Low Down Payments - As little as 3.5% down will work in most instances, and 5% covers most others.

  • Higher Loan Amounts - In some areas, FHA maximums can exceed conventional loan limits.

  • Lower Total Cash to Close -Sellers can help pay closing costs, and borrowers can receive gift money toward their down payments.

  • Streamlined and Cash Out Refinancing - Subsequent refinancing can be far easier and more lenient with FHA loans than with conventional loans.

  • Purchase and Rehab Financing - The FHA 203k loan can be a great option for the purchase of homes in need of a quick spruce up or even major remodeling when you don't have sufficient funds to do it on your own.

The FHA mortgage program continues to evolve. Both the upfront and ongoing mortgage insurance costs have become more expensive. While the increase makes FHA loans less advantageous than in the past, they are still a good option if your needs and situation preclude you from qualifying for a conventional loan.