FHA Mortgage Loans
By now, you have more than likely heard of what is called a FHA mortgage loan, but what exactly is it? FHA stands for the Federal Housing Administration. A FHA loan isn’t actually a loan from the FHA; actually it is a federally insured loan. HUD insures the loan against future default by the borrower, protecting the lender, in form of a mortgage insurance premium or MIP. FHA loans are a great option for home buyers who may not qualify for a traditional home loan.
The FHA 203(b) fixed rate home loan program is the most common and widely used section of the FHA purchase loan program. With a FHA loan, you are only required to have a 3.5% down in most cases, and borrowers are allowed to use gift funds for the down payment. With a FHA loan, you may finance up to a maximum of 96.5% loan-to-value (LTV), and may be financed for either 15 or 30 year terms.
FHA loans may be used for new or existing one-to-four family units and include condos and townhouses. They may also be in urban or rural areas. Each county in Texas specifies the FHA loan limits and your partner at Gold Financial Services will make you aware of these limits during the process.
All FHA loans will require a Mortgage Insurance Premium (MIP). Mortgage Insurance is paid by the borrower and is in place to protect the lender if the borrower defaults on the loan. There is an upfront mortgage insurance premium (UFMIP) which is equal to 1.75% of the loan amount that can be added to the loan amount or paid by the borrower at closing. The monthly mortgage insurance premium (MIP) is calculated based upon both the loan term, and the loan-to-value. Unlike a conventional mortgage, the mortgage insurance premium for a FHA loan is paid for the entirety of the loan and may not be cancelled from your monthly payment after the commencement of the loan.
Benefits and Advantages
Why choose to purchase your home with a FHA loan? Here are the advantages.
- Lower Interest Rate – compared to conventional loans, FHA generally carries a lower interest rate. Because HUD insures the loans against future default, a lower rate may be offered by lenders.
- Lower Down Payment – FHA loans only require a 3.5% down payment compared to 5% on conventional loans. Also, the borrower may receive a “gift” from family members to be used as a down payment.
- Easier Qualification – the required minimum credit score for a FHA loan is lower compared to conventional loans. Underwriting guidelines for Gold Financial Services will allow for credit scores as low as 580, certain restrictions apply.
- Higher Debt-to-Income Ratio – FHA loans can go as high as 57% debt-to-income (DTI) ratio with compensating factors. Conversely, conventional loans may only go up to 45% DTI. This gives the borrower the ability to purchase a more expensive home or a higher sales price as compared to conventional loans. In many cases, the higher allowable DTI is the deciding factor when choosing between FHA and conventional loans.
For additional information on how to benefit from a FHA loan, contact our Home Loan Specialists at 210-802-4665.