Definition of an FHA Mortgage
An FHA mortgage is a mortgage that is secured by the federal government, specifically the Federal Housing Administration. Basically, this means that if a borrower quits paying and loses their home in a foreclosure, the government will make sure the lender doesn’t suffer any losses. You don’t actually get your mortgage from FHA; you must use an FHA-qualified lender. Since all lenders must originate their FHA loans based on the same core guidelines, it’s important to compare your mortgage options when getting an FHA loan.
Benefits of an FHA Mortgage
FHA mortgages have many benefits that can really make the difference for first-time home buyers or buyers with less-than-perfect credit. Some of the benefits of an FHA mortgage include the following:
Low Down Payment
FHA mortgages require as little as 3.5 percent down. This is one of the lowest down payments of any loan product currently available. Conventional products typically require between 10 and 20 percent down, so this is a huge benefit to those with a little less cash in the bank.
Easier To Qualify
The entire reason the government started the FHA program was to help extend mortgage loans to borrowers during and after the Great Depression. FHA has continued its legacy of putting homeownership within more people’s reach by having broader mortgage guidelines.
One unique feature of FHA mortgages is that they are assumable. This means that someone may assume your home loan when you sell, if they qualify of course. This is a huge benefit when interest rates rise, as the low interest rate of your FHA mortgage can be assumed by your home’s new owners.
Co-Applicant and Gift Funds
For those needing a little extra push to get started, or for those with family members gifting them money, FHA allows for both co-applicants and gift funds. Co-applicants actually qualify for and are responsible for the mortgage with you. While there is no requirement as to who actually pays the mortgage, it must be paid on-time each month, or you will both be held liable. Gift funds can be used for a portion or all of your down payment for your FHA mortgage.
Other FHA Mortgage Considerations
All FHA mortgage loans whose loan amount is at or above 80 percent of the sales price will require mortgage insurance. Mortgage insurance comes in two forms: up-front and annual. Up-front mortgage insurance is paid when the loan is originated and equals 1.75 percent of the loan amount. Then, there is an annual mortgage insurance assessed on a monthly basis. The cost of this will vary based on several factors such as loan-to-value ratios and term length and can range from 0.45 percent to 1.35 percent.
Property Qualification Standards
While not strict, FHA can’t loan on all properties. It requires that properties meet its Minimum Property Standards (MPS). These standards include things such as a roof with a life of at least 2 more years, no exposed wood outside, and no cracked or broken glass.
Maximum Loan Amount
The maximum amount you can borrow on an FHA loan varies by county. Look up your county’s maximum here.