We often hear mortgage terms tossed around like “VA” and “VHDA” and also “FHA.” Today, let’s explore “FHA” and break down what the home loan is all about.
An FHA loan is a mortgage that is insured by the Federal Housing Administration. The loan has more lenient credit requirements and tends to be more forgiving about credit history with regard to bankruptcy and foreclosures.
The program may accept credit scores as low as 580 and require at least a 3.5 percent down payment. With a 10 percent down payment or more, a score below 580 may be acceptable, providing you meet all program guidelines. The loan is for primary residences only.
If you previously experienced a bankruptcy, short sale or foreclosure, follow these guidelines.
The use of an FHA loan requires a passage of two years since the discharge date of a chapter 7 bankruptcy. A chapter 13 bankruptcy may be acceptable after at least 12 months of an on time pay-back period and the borrower has received permission from bankruptcy court to enter the mortgage transaction.
Three years must pass if you went through a short sale or foreclosure.
FHA loans also come with mortgage insurance, which protects the lender for any losses suffered if the borrower defaults on the payment. There are two types of mortgage insurance premiums as part of the loan. One is called upfront mortgage insurance premium (UFMIP) which has a rate of 1.75% of the loan amount. The fee can be added to the loan amount or paid in full as part of your closing costs. In addition, FHA loans also have a 0.8-0.85% (of the loan amount) monthly mortgage insurance. In most cases, this mortgage insurance remains for the life of the loan. To eliminate the mortgage insurance, the borrower must refinance the loan into a non-FHA loan program and have 20% equity in the property.
Additionally, the seller can contribute up to 6% of the sales price or appraised value (whichever is less) to help the buyer with closing costs and prepaid expenses.
FHA loans are assumable, which means that when the homeowner sells a home, the buyer may be able to take on the existing loan and terms (e.g.: balance, rate and remaining loan amount). Of course, anyone interested in the assumable loan feature must go through the approval process (credit check, income verification) with the current lender on the property.
FHA loans are a great option if you aren’t able to make a large down payment or have had credit challenges in the past.
Make sure to ask the right questions of your mortgage lender so you obtain the best loan possible.
Shikma Rubin is a loan officer at Tidewater Home Funding in Chesapeake. She enjoys the chance to lead workshops and webinars on how to buy a home in 2019. Have mortgage questions? You can reach her at srubin@tidewaterhomefunding.com or 757-490-4726.