Pros and Cons of FHA Loans
By Justin Pritchard, About.com Guide
The Federal Housing Administration (FHA) is one Division of the Federal Agency of Housing and Urban Development (HUD). FHA provides several mortgage programs to assist and promote home ownership. FHA mortgage programs are have grown in popularity since 2007, because the FHA Programs allow borrowers to buy a home with a smaller down payment than is required by the GSE’s (Fannie Mae and Freddie Mac) or portfolio lenders. FHA underwriting guidelines offer options to make it easier for borrowers to qualify for a mortgage.
FHA Loans are different:
The performance of Fannie Mae and Freddie Mac are not insured nor guaranteed. A FHA loan is insured against default by the FHA. The whole loan is not insured, only a portion of the loan is insured, A VA loan has a portion guaranteed. Because of this level of insurance, lenders are more willing to make mortgage loans at better terms. In High Cost Areas, FHA loan amounts are eligible to $636,150 whereas the Fannie Mae and Freddie Mac limits are also limited to $636,150, with the same LTV limits to 96.5%. FHA does not offer Super Jumbo Mortgages.
FHA Loan Qualification:
By design FHA Loans are structured to offer greater access to home ownership. FHA Loans do not have income limits that are associated with other low down payment programs. However, there are limits on how much you can borrow. In general, you’re limited to modest loan amounts relative to home prices in your area. FHA offers two loan amount limits, both are based upon county limits; Conforming and Jumbo-Conforming.
FHA Mortgage loan qualification standards vary from lender to lender and sometimes from program to program. FHA Loans typically have a maximum debt to income ratio up to 45% but some lenders will allow a debt ot income up to 50% of further importance is the credit scores. Lenders do not average your credit score. Lenders will utilize your middle credit score (utilizing 3 scores) from the weakest borrower. Typically, since 2008, lenders have minimum FICO Scores limits of 640 for conforming loans and 660 for Conforming Jumbo loans. However, there are some lenders willing to use FICO Credit Scores as low as 620 or slightly less.
Benefits of an FHA Loan:
FHA Mortgage loans are not perfect for all borrowers, however they meet the needs of many borrowers.
One unique feature of the FHA Mortgage Loan over all other options is the Conforming Jumbo loan has the ability to reach a loan limit of $625,250 in some high cost areas, with only a 3.5% down payment.
FHA offers a few other bells and whistles as well:
- Easier to use gifts for down payment and closing costs
- No prepayment penalty Possible leniency during financial hard times
- Funding for home improvement (through FHA 203k programs)
- Reverse Mortgages allow for no mortgage payments are available
- Streamline refinances
Disadvantage to be aware:
Due to recent changes in FHA Mortgage Programs there have been changes to Fees. FHA will charge you an up from Mortgage Insurance Premium (MIP) Fee of 1.75% of the loan amount. This amount is financed into the mortgage. FHA will charge you a Monthly MIP Fee that varies depending upon the Loan to Value.
One of the major recent changes to FHA loans is that the Monthly MIP will not go away if the originated loan exceeds 78% Loan To Value. the 15 yr loans are no longer exempt.