The Federal Housing Administration was created in 1934 in an effort to bolster homes sales during the Depression. By financially guaranteeing loans, the FHA lifts much of the risk of non-payment and foreclosure from private lenders. It is important to remember that the FHA is not a lender; they just guarantee your loan.
Minimum credit scores for FHA loans depend on the type of loan the borrower needs. To get a mortgage with a down payment as low as 3.5 percent, the borrower needs a credit score of 580 or higher.
FHA borrowers can use their own savings to make the down payment. But other allowed sources of cash include a gift from a family member or a grant from a state or local government down-payment assistance program.
The FHA allows home sellers, builders and lenders to pay some of the borrower’s closing costs, such as an appraisal, credit report or title expenses. For example, a builder might offer to pay closing costs as an incentive for the borrower to buy a new home.
Two-part mortgage insurance
Two mortgage insurance premiums are required on all FHA loans: The upfront premium is 1.75 percent of the loan amount — $1,750 for a $100,000 loan. This upfront premium is paid when the borrower gets the loan. It can be financed as part of the loan amount.
The second is called the annual premium, although it is paid monthly. It varies based on the length of the loan, the loan amount and the initial loan-to-value ratio, or LTV. The following premiums are for loans of $625,500 or less.
Annual premiums for FHA loans
- 30-year loan, down payment (or equity) of less than 5 percent: 0.85 percent
- 30-year loan, down payment (or equity) of 5 percent or more: 0.80 percent
- 15-year loan, down payment (or equity) of less than 10 percent: 0.70 percent
- 15-year loan, down payment (or equity) of 10 percent or more: 0.45 percent
Borrow Cash for Repairs
The FHA has a special loan product for borrowers who need extra cash to make repairs to their homes. The chief advantage of this type of loan, called a 203(k), is that the loan amount is not based on the current appraised value of the home, but on the projected value after the repairs are completed.
A so-called “streamlined” 203(k) allows the borrower to finance up to $35,000 for nonstructural repairs, such as painting and replacing cabinets or fixtures.
- Bankruptcy not an automatic disqualification
- Lower interest rates
- Down payment is less
- Lower mortgage points and other closing cost requirements
- Resale can be made more quickly
- Is backed by the U.S. government
- 3.5% Down Payment
- Gift Funds Available
- Seller can pay closing costs