FHA Loan

What is FHA Loan?

FHA Loans is a mortgage process by which loan is backed by Federal Housing Administration and is specifically designed for people from low to moderate-income groups.

Types of FHA Loan

FHA Loan Types

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: FHA Loan (wallstreetmojo.com)

#1 – Traditional First Home Mortgage

For individuals or families looking towards buying their first home.

#2 – Home Equity Conventional Mortgage

It is designed for senior citizens to help them in converting the equity in the home to cash while retaining the title of the house. They can choose monthly payment or line of creditLine Of CreditA line of credit is an agreement between a customer and a bank, allowing the customer a ceiling limit of borrowing. The borrower can access any amount within the credit limit and pays interest; this provides flexibility to run a business.read more or a combination of both.

#3 – FHA 203(k) Improvement Loan

This facility allows an individual to add the amount of renovation and certain repairs required on home into the loan taken. i.e. this facility takes responsibility for home buying and improvements for the owner.

#4 – Energy-Efficient Mortgage Program

This program allows upgrades such as insulation, solar, or wind energy system installation for home. The main purpose is to promote the concept of energy-efficient homes with lower operating costs. It will help the borrower in terms of reduction in bills over the years.

#5 – Section (245)a Loans

When the borrower expects an increase in his/her level of income. This program initially charges a lower monthly payment, which increases gradually over time. This allows the borrower to buy dream homes at an early stage of his/her career and payout mortgage as the level of income grows.

#6 – Fixed-Rate

A fixed-rate is applied on the mortgage to help the borrower to understand payment terms and amounts. It is designed for borrowers who think loan interest rate can go up and to avoid that they select this option.

#7 – Adjustable-Rate

The interest rate in such a program is adjusted as per market condition so payment amount and terms depend on interest rate in the market.

FHA-Loan

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: FHA Loan (wallstreetmojo.com)

Insurance on Mortgage

FHA insures mortgage payment on behalf of the borrower, so if borrower defaults lender will still be able to recover mortgage payment from FHA. FHA charges a fee to a borrower.

  • Upfront Mortgage insurance premium of 1.75% on the base loan amount.
  • The borrower pays a modest monthly fee with each ongoing payment, which depends on the level of risk involved for FHA. Shorter period and less amount reduce fee level but charges are around 0.45% to 1.05% annual basis.
  • Applicable for various types of properties like single-family homes, manufactured properties, duplexes, etc.
Example

FHA Loan Requirements

  1. Credit Score: To qualify for this loan, the minimum requirement of credit score is 500.
  2. Debt to Income: Debt to income ratioDebt To Income RatioThe debt to income ratio (DTI) measures the borrower's potential to clear the liabilities (payable in installments) from the monthly income. It is computed as a percentage of monthly debt payments to the gross monthly income. The lower the ratio, the higher is the borrower's repayment capability.read more indicates the percentage of your income before tax you spend on payment of debt including mortgage, credit card, student loan, etc. The ideal debt to income ratio is 50% or less.
  3. 5% Minimum Down Payment: FHA requirement changes as per the credit score of an individual, but a minimum 3.5% of a down payment is applicable for an individual with a credit score higher than 580. An individual with a credit score within the range of 500 to 579 minimum down payment of 10% is applicable.
  4. 75% upfront mortgage insurance premium payment of base loan amount.
  5. Primary Residence and Property Requirements: the house must be the primary residence of an individual or family and must qualify all property requirements as per law. For e.g. Safety, security, and sound condition.
  6. Individuals must have at least two credit accounts. For e.g. credit card.
  7. Should be clean in terms of legal procedure and without a history in fraud or any kind of crime related to taxation or debt.
  8. The donor must declare down payment with the help of the third party in writing.

FHA Loan Limits for 2020: The loan limit for 2020 ranges from around $331,700 to $765,600, depending on area and country.

How to Apply for FHA Loan?

The following ways for applying for this loan.

A – Personal and Financial Documents

  • Social Security Number.
  • Proof of US citizenship, legal permanent residency, or eligibility to work in the US.
  • Bank statement for one month at least. With documentation of any deposit made during this time.

B – Lenders Requirement

  • Credit reports.
  • Tax records.
  • Employment records.
  • Additional paperwork for further proof in case the borrower is a student or a fresh graduate.

C – The decision of the right plan applicable to you.

D – Discussion with broker and loan officer regarding your application.

Difference between FHA Loan and Conventional Loan

SectionsFHA LoanConventional Loan
DefinitionA loan insured by the Federal Housing Administration, specially designed for individuals falling under lower to middle-income level groups to help them in buying their own house.A loan through Bank or any financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more who is qualified as per their terms and conditions and have the ability to provide proof and necessary payments.
Credit ScoreMinimum 500Minimum 620
Down PaymentIndividuals above credit score of 580 minimum 3.5%, For an individual with a credit score within a range of 500 to 579 at least 10% of down payment.Minimum of 3% for individuals with a high credit score and up to 20% for lower credit score.
Period15- 30 years10 – 30 years
Insurance FeeUpfront MIP of 1.75% on Loan Base amount and up to 11 years or throughout loan term depending on Loan to Value ratio.Not applicable on a down payment on 20% or if a loan is paid up to 78% of its value.
MIPUpfront MIP of 1.75% on Loan Base amount and Annual payment between 0.45% to 1.05%.0.5% to 1% of the loan amount per year.
Assistance AvailableYesNo

Benefits

  • Lower Credit Score: FHA programs is specially designed for lower to middle-level income group, who don’t have a higher credit score that is required in the conventional loan process.
  • Down Payment: Minimum Down payment of 3.5% is required which is very less compared to the conventional loan process where the minimum down payment requirement can be up to 20%, which is not possible for everyone.
  • Up to 50% of Debt to Income Ratio: Even with higher debt to income ratio up to 50% of income individuals can apply for these loans.
  • Promote Housing Market: In terms of the economy, it is helpful and promotes the young generation to buy their own house.

Disadvantages

  • Mortgage Insurance Premium: Mortgage insurance premium on a monthly basis can last for the entire loan term in case down payment of less than 10%.
  • Property Standards: To qualify for FHA loan property, which borrower wants to buy must qualify according to standards as per safety, security, and sound condition. These conditional requirements are observed strictly.
  • Loan Limit: Compare to conventional loan process FHA loans have to limit as per the location of a property. The minimum and maximum amount for a loan are decided by an agency and only that much amount can be provided as a loan.

Conclusion

Although FHA loans started in 1934 to get out of economic depression and help people to buy their own house, its actual application started in 1965. Federal Housing Administration acts as an insurer for a mortgage for the borrower and payout debt in case borrower defaults.

FHA has been successful to promote housing market in the US over many decades, and many Citizens able to fulfill their dream of buying their own house at an early stage with the help of an FHA loan.

Recommended Articles

This has been a guide to what is FHA Loan and its definition. Here we discuss how to apply for federal housing administration loans and with its requirements, types, and benefits. You can learn more about Corporate Finance from the following articles –