FHA Residential Loan

What is Federal Housing Administration (FHA) Loans?

A Federal Housing Administration (FHA) loan is a home mortgage that is insured by the government and issued by a bank or other lender that is approved by the agency. FHA loans require a lower minimum down payment than many conventional loans, and applicants may have lower credit scores than is usually required.

The FHA loan is designed to help low- to moderate-income families attain homeownership. They are particularly popular with first-time homebuyers.

How Much is FHA Mortgage Insurance Premium?

Your FHA loan MIP will involve two payments: an upfront premium and an additional annual payment. The amount you’ll pay for both depends on the size of your loan.

Your MIP upfront payment will be equal to 1.75% of the total value of your loan. For example, if you borrow $150,000 for your mortgage, you’ll pay $3,500 for your upfront payment. Your upfront MIP is due at closing. Alternatively, it can be added onto the balance of the loan. Your upfront payment is only due once unless you refinance or take on another FHA loan in the future.

Your annual mortgage insurance costs will vary depending on how much money you borrow, the size of your down payment and the length of your mortgage term. Lenders calculate your annual payment as a percentage of your base loan value.

Most FHA lenders add your annual MIP to your monthly mortgage payment. To find out how much you’ll pay each month, simply divide your annual payment by 12.

How Long You Have to Pay for FHA Insurance?

Before 2013, MIP worked similarly to the private mortgage insurance (PMI) that you pay on conventional loans. Once you reach 22% equity in your home, a conventional mortgage lender automatically cancels your PMI.

Today’s FHA lenders no longer cancel your MIP once you reach a certain home equity percentage. The amount of time you’ll need to pay MIP depends on your down payment. If you have at least 10% down at the time of your purchase, you’ll pay MIP for 11 years. If you have less than 10% down at the closing table, you’ll pay MIP for the entire term length.

How to Qualify for FHA

• FICO score at least 580 = 3.5% down payment.

• FICO score between 500 and 579 = 10% down payment.

• MIP (Mortgage Insurance Premium ) is required.

• Debt-to-Income Ratio < 43%.

• The home must be the borrower's primary residence.

• Borrower must have steady income and proof of employment.

Types of FHA Loans

• Traditional Mortgage: A mortgage that finances a primary residence.

• Home Equity Conversion Mortgage: A reverse mortgage that allows homeowners ages 62+ to exchange home equity for cash.

• 203(k) Mortgage Program: A mortgage that includes extra funds to cover the cost of repairs, renovations, and home improvements.

• Energy Efficient Mortgage Program: A mortgage that includes extra funds to pay for energy-efficient home improvements.

• Section 245(a) Loan: A Graduated Payment Mortgage (GPM) has a low initial monthly payment that increases over time. A Growing Equity Mortgage (GEM) has scheduled increases in monthly principal payments to shorten the loan term.

Benefits of FHA Loan

An FHA loan is a government-backed mortgage option that gets its namesake by being insured by the Federal Housing Administration (FHA). Since FHA loans are insured by the government, lenders feel more comfortable taking on riskier borrowers, which can grant you, the borrower, more leniency when it comes to meeting certain loan qualifications, like credit score and debt-to-income ratio (DTI). Simply put, you may still qualify for an FHA loan without having to be the perfect financial candidate. 

For some, this added flexibility on loan qualifications may be just enough to help finally become a homeowner, but for others, a conventional loan could serve their needs perfectly well. Let’s break down exactly what FHA loans can offer their borrowers and further explore in which cases an FHA loan might be right for you. 

Cons of FHA Loan

Like most good things, FHA loans also come with a few drawbacks or considerations to keep in mind. Here are some of the main cons to prepare for when it comes to taking out an FHA loan:

Mortgage Insurance Premiums 

Although FHA loans are more flexible than conventional loans, to give themselves a safety net, lenders will require that you pay mortgage insurance. Mortgage insurance premiums (MIPs) protect the lender against any losses should you default on your payments and are the FHA equivalent of a conventional mortgage’s private mortgage insurance (PMI). 

FHA loans require both upfront and annual MIPs from borrowers, regardless of how much money you put toward your down payment. You’ll have MIP for the life of your loan unless you make a down payment of 10% or more, in which it will come off the loan after 11 years. The amount you pay for mortgage insurance premiums, will depend on the size of your loan, with your MIP at 1.75% of your loan’s total value. This amount is due at the time of closing or it can be added to your loan’s overall balance. 

While this may sound like a big drawback for FHA loans, keep in mind that unless you have a strong credit score, PMI for a conventional loan is likely to be pretty pricey. Be sure to investigate what you’d be paying with private mortgage insurance versus FHA MIPs to ensure you’re making the best financial decision for you. 

Less Attractive Offers 

Buying a house can already be a stressful and competitive process, so it’s important to know what you bring to the table for a seller. Unfortunately, FHA financing does have a more unfavorable stigma attached to it than conventional loans, as the standards for FHA borrowers is less exclusive. 

Restrictive Loan Maximums 

Depending on how much you want to borrow, an FHA loan may or may not be right for you. Currently, the FHA ceiling, or the highest amount a borrower can take out through the FHA loan program, has been set at $970,800 for a single-family home loan in a high-cost area. For 2022, the FHA floor was set at $420,680 for single-family homes in a low-cost area. 

Frequently Asked Questions

Can I acquire an FHA loan with student debt? 

In short, yes, you can still qualify for an FHA mortgage even if you have outstanding student debt, though it may present some challenges. If you’re making monthly payments toward your student loans, this will limit how much money you can borrow by affecting your DTI. Since your debt-to-income ratio is calculated using your total monthly debts, lenders will have to take your student loan payments into consideration, and depending on your debt, you may have to apply for a smaller mortgage. 

Can I get pre-approved for an FHA loan? 

Yes! Lenders approved by the FHA can get you preapproved for an FHA loan based on your income, down payment amount, credit history and credit score, and other factors. 

Do I have to pay closing costs on an FHA loan? 

Yes, though the closing costs associated with an FHA loan are usually very similar to those of a conventional mortgage. They also include your upfront mortgage insurance premium, third-party fees (like appraisals, attorneys, notaries, etc.), lender fees and prepaid fees.