Advantages and Costs of a FHA Mortgage

There are many advantages to choosing a FHA mortgage. Lower qualification criteria as well as a low down payment of 3.5 are only two advantages. What is a FHA mortgage and why would a buyer choose this type of loan?

FHA is an acronym for Federal Housing Administration. The federal government has insured private loans since the 1930's. The FHA is a part of HUD (Department of Housing and Urban) and is a self supporting agency.

FHA loans are known to be for first time buyers. However these loans are available to everyone.

The most popular loan is the 203(b) that only has a three and a half percent down payment and allows one hundred percent of the money required to close be a gift from other sources.

These loans have helped lower to middle income homebuyers for over seventy years. These loans are regaining favor and allow qualification after 2 to 3 years of a foreclosure or bankruptcy. The income guidelines are much more flexible than conventional loans from Fannie Mae and Freddie Mac.

A FHA refinance is possible with little home equity and a credit score above 580.

These loans have advantages over other loan types. Consider first the basic FHA loan requirements below.

Two years of steady employment with the same employer is best.

Last two years of income should be holding steady or increasing.

Credit Report should be a 620 or higher; only 2- 30 day late payments.

There are cases when no credit can still be approved.

Debt ratios should be 30% of before taxes income.

Foreclosures should be past the 3 year mark with on-time payments since.

Bankruptcy should be past the 2 year mark with on-time payments since.

Advantages of a FHA loan

They are assumable which means a buyer may take over the loan

Only 3.5 percent is required for a down payment.

As of January, 2009 a borrower can finance 96.5 % of the purchase price with 3.5 down.

They allow higher debt ratios than conventional loans.

There are small or no adjustment rates.

Insurance for mortgages of 1.5 percent is added to the loan balance instead of being paid of pocket.

Low closing costs.

Repair requirements of the home to be purchased were tough in former years. Requirements have changed such as the examples below which are costly items.

Older roofs on homes do not have to be replaced if there are no leaks.

Cracked window panes and sticky windows do not have to be replaced.

Further information for FHA loans can be found on the website www.fha-home-loans.com.