7 Crucial Facts about FHA Loans

RIS Media, by Marcie Geffner, March 3, 2014

An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.

Because of that insurance, lenders can, and do, offer FHA loans at attractive interest rates and with less stringent and more flexible qualification requirements.

• 1. Less-than-perfect credit is ok:
  The FHA doesn't mandate a minimum credit score. Instead, each borrower's creditworthiness is considered in context. Some leeway is allowed. Lenders can, however, overlay their own requirements on top of the FHA's guidelines. Some lenders might require a minimum credit score.
• 2. Minimum down payment is 3.5 percent:
  That is a fraction of the percentage typically required on most other loans.
• 3. Closing costs may be covered:
  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 inducement for the borrower to buy a new home.
  Lenders typically charge a higher interest rate on the loan if they agree to pay closing costs. Borrowers can use the good faith estimate of closing costs, commonly known as the GFE, to compare interest rates and closing costs on different loans and figure out which option makes the most sense.
• 4. Lender must be FHA-approved:
  Borrowers should shop around because not all FHA-approved lenders offer the same interest rate and costs—even on the same FHA loan.
• 5. Mortgage insurance is a must:
  Two mortgage insurance premiums are required on all FHA loans: The up-front premium is 2.25 percent of the loan amount, and the annual premium is 0.55 percent of the loan amount. The up-front premium must be paid when the borrower gets the loan but can be financed as part of the loan amount. The annual premium is paid in chunks of 1/12th of the total along with each month's mortgage payment.
• 6. A loan that is not FHA-insured requires a much larger down payment
• 7. Financial hardship relief allowed:
  Loan servicers can offer some relief to borrowers who have an FHA-insured loan, have suffered a serious financial hardship, and are struggling to make their payments. That relief might be a temporary period of forbearance, a loan modification that would lower the interest rate or extend the payback period, or a deferral of part of the loan balance at no interest.

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