FHA Mortgage Loans

From its beginning in 1934, the Federal Housing Administration (FHA) has helped millions of Americans achieve their goal of homeownership. Since the housing collapse and subsequent economic recession of 2007-8, the need for FHA-backed home mortgages has grown dramatically. The FHA loan is now one of the fastest-growing and most popular home mortgage programs available.

The FHA Mortgage loans program was designed for borrowers who may not qualify for conventional financing. And since 2008, the program has been refined to accommodate the rising number of borrowers whose finances have been stressed by the weak economy. Those with credit scores above 500 can qualify for an FHA loan though credit scores below 579 are limited to a 90% loan-to-value ratio. Young and first-time borrowers, or those seeking a high-quality loan with a minimal down payment, should consider an FHA loan.

How does the FHA loans program work?

Despite its name, the Federal Housing Administration does not originate FHA loans. Rather, these loans are originated by private sector lenders but insured by the FHA in the event of a borrower default. Because the loans are backed by the federal government, they carry less risk to the lender who, in turn, can offer competitive pricing with lower lending requirements to borrowers deemed too risky for conventional financing.

Because the FHA is liable for mortgages under its program, all FHA loans require a Mortgage Insurance Premium (MIP). This is a monthly premium added to the mortgage payment and paid by the lender to the FHA. The MIP is determined by the loan’s term and loan-to-value ratio, and ranges from .35% per year (for loans 15 years or shorter with a less-than-90% LTV), to 1.25% per year (for 30 year loans with more-than-95% LTV). These numbers are scheduled to increase on April 1st, 2013.

In addition to the yearly mortgage insurance premium, FHA loans require an up-front mortgage insurance premium (UFMIP). This is an up-front cost equal to 1.75% of the total loan amount, and must be paid to the FHA within 10 days of closing. However, unlike conventional down payments, the UFMIP may be rolled into and financed with the mortgage loan.

These rates are considerably higher than comparable Private Mortgage Insurance (PMI) for conventional loans. And unlike conventional loan programs that only require insurance on homes with less than 20% equity, FHA loans require borrowers to pay the mortgage insurance premium for five years or until the loan is paid down to 78% of its original principal whichever occurs last. Beginning on June 3rd, 2013, the FHA will require mortgage insurance to be paid for the entire life of the loan if the original LTV ratio is less than 90%.

While the insurance requirements of FHA loans are comparatively expensive versus their conventional counterparts, the lower interest rates available on FHA loans helps offset this cost. Since the up-front premium can be financed, and the yearly premium is broken down month-bymonth, most borrowers will find the increased expense of the mortgage insurance premiums negligible.

What loan products does the FHA program offer?

The FHA offers several different loan products. There are 15- and 30-year fixed loans for new home purchases; adjustable rate loans for lower initial monthly payments; refinances for existing FHA loans to lower the interest rate or term; or cash-out refinances to turn a home’s equity into cash.

FHA loans can also be a valuable tool for beginning investors. Since the FHA offers loan programs for non-owner occupied properties, those wanting to add an investment property to their portfolio or refinance their existing investment property will find a suitable FHA program.

While the FHA offers many loan products, there are fewer options available than with conventional loan programs. Consult your mortgage broker to find out more about the FHA loan program and to see which FHA loan product meets your financial needs.

Company NMLS ID # 1591 (www.nmlsconsumeraccess.org); CO–Mortgage Company Registration, Churchill Mortgage Corporation, 104 S Cascade Ave. Ste. 201A, Colorado Springs CO 80903-5102, Tel 888-562-6200, Regulated by the Division of Real Estate
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