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FHA home loans have been around since the 1930s, and it's no wonder why they've stood the test of time. FHA mortgage lenders offer affordable financing, low down payment requirements, and competitive mortgage rates to those who qualify. Additionally, existing homeowners can take advantage by refinancing their current mortgage into a FHA loan.

FHA Home Loan and Mortgage Overview: Making It Work for You

A FHA loan is a federal assistance mortgage loan insured by the Federal Housing Administration (FHA). The FHA provides this mortgage insurance to specific FHA-approved lenders throughout the United States for singly family and multifamily homes. FHA is the largest insurer of mortgages in the world and has insured over 34 million properties since 1934. Originally created to regulate interest rates and mortgage terms, the agency allows approved banks to continuously issue loans without putting out substantial capital of its own.

Homeowners and borrowers who utilize FHA loans pay fee, more commonly known as the FHA's mortgage insurance premium (MIP). Interestingly, the FHA is the only government agency that operates on such self-generated income, and costs taxpayers nothing. In return, FHA stimulates the housing markets and community developments considerably by providing affordable financing to homeowners across the nation.

FHA demand diminished during the 1990s as home prices increased significantly, and lenders developed much more enticing products. Many lenders surpassed the FHA low down payment requirement by providing 100 percent financing to qualified buyers. In addition to such offerings, many lenders began to loosen their loan qualifications significantly.

Recently, FHA loans have grown in popularity as their mortgage limits have been modernized and other financing alternatives have been severely limited. Especially due to the subprime market fallout, FHA mortgage lenders have since filled the void for low-to-moderate income borrowers and individuals with less-than-stellar credit. It is worth noting that FHA home loans are nowhere near as toxic as the popular subprime mortgages of recent years. Fortunately, FHA lenders have always required strict documentation from borrowers and primarily issue low, fixed-interest rate home loans.

How Can You Obtain an FHA Loan?

Remember, the FHA does not originate loans themselves. Instead, they merely insure loans made by select private lenders. To obtain an FHA loan, the first step is to locate an FHA-approved mortgage lender or broker. Since these lenders can then set their own rates and terms, it's important to shop a few lenders to receive multiple offers. Once decided, the mortgage lender will need to qualify you under a set of specific loan guidelines. From this point forward, obtaining your FHA home loan will be as simple as most other mortgages.

Who Are Good Candidates for FHA Mortgages?

Key candidates for FHA loans include:

  • First Time Home Buyers
  • Low-to-Moderate Income Families
  • Borrowers with Less-than-Excellent Credit
  • Potential Home Buyers with Small Down Payments
  • Borrowers with Previous Bankruptcies or Foreclosures

To help these select individuals, FHA loans offer low down payments, low closing costs, easier qualifying standards, and competitive interest rates.

What Are The Borrower Eligibility Requirements For FHA?

  • Credit Scores: Although FHA loan requirements do not have a minimum FICO credit score, the private mortgage lending institutions are allowed to set requirements of their own. Borrowers will typically find the minimum FHA credit score range to be within 580 to 620. There are still a few FHA lenders who can work with credit scores as low as 500 and even with borrowers without credit at all
  • Qualifying Standards: FHA mortgage lenders typically have more lenient guidelines than their conventional-loan counterparts, Fannie Mae and Freddie Mac. However, as financing choices have become limited during this tightened credit market, borrowers may need to shop carefully to find a FHA approved lender with ideal terms
  • Documentation: FHA lenders require full documentation of loan qualifications such as proof of income, assets and bank statements, and debt loads. FHA mortgages also require borrowers to have a valid Social Security number, reside in the country legally (but citizenship isn't required), and provide any other necessary financial documentation
  • Mortgage Loan Limits: Borrowers must pay special attention to key FHA mortgage limits. These loan limits vary depending on state and county location, as well as the housing-type category. This strict mortgage limit can commonly become a deciding factor in FHA loans
  • Mortgage Insurance Premiums: FHA home loans have an upfront premium set as a percentage of the home loan, which depends on the type of mortgage transaction. Purchase loans and qualifying refinance premiums cost 1.75 percent, while FHA streamline refinance premiums are 1.50 percent. There are also annual premiums which can be .25, .50, .55 percent depending on the exact term and LTV of your FHA loan

Key FHA Loan Benefits

  • Low Down Payment Requirements: Borrowers can look forward to owning a home sooner with FHA's low down payment requirement. Due to recent mortgage reform, the previous FHA down payment requirement of 3 percent has now been increased to 3.5 percent
  • Non-Traditional Credit: Depending on the FHA mortgage lender, borrowers may be able to utilize non-traditional credit. Such documentation can include utility bills, car insurance paperwork, phone bills, and retail store credit accounts
  • Compensating Factors: One of the beauties of FHA loans is the use of manual underwriting. This is a significant advantage for borrowers as common-sense underwriting is used in addition to regular FHA guidelines. Compensating factors can include strong reserves (assets) and larger down payments. (i.e., if your debt-to-income ratio is weak, you might qualify by presenting a 10 percent down payment and 12 months worth of assets in banking reserves)
  • Bankruptcy and Foreclosures: These specific financial hardships will not automatically disqualify loan applicants in a FHA loan. Borrowers with a previous bankruptcy may still qualify if they've maintained a clean history for at least 2 years from the date of discharge. It's 3 years for homeowners with a previous foreclosure
  • Non-Occupant Co-Borrowers: To help with specific issues such as income requirements, non-occupant individuals may be eligible for consideration in the application of a FHA loan. Typically, FHA mortgage lenders require these non-occupying borrowers to be direct relatives or individuals with a history of significant relationship
  • No Prepayment Penalties, Teaser Rates: As previously mentioned, FHA home loans are distinctly different from subprime offerings. FHA borrowers will not be shocked by adjusting interest rates, or inescapable prepayment penalty fees

Can You Refinance a Current Mortgage with an FHA Loan?

Yes, you can. Although FHA loans are great for first time home buyers, there are still FHA refinancing options for existing homeowners. The FHA offers three main types of refinance mortgage loans:

  • Streamline Refinance: FHA allows this category of refinances only to existing FHA mortgages. Depending on the FHA mortgage lender, the FHA streamline refinance can be an accelerated process with a limited need for appraisals and credit checks
  • No Cash-Out Refinance: This FHA conversion refinance can be used to convert a conventional mortgage, VA mortgage, or non-conforming loan into a traditional FHA loan. No cash can be used to payoff additional loans or be given back to the borrower; otherwise the loan will be considered a cash-out refinance
  • Cash-Out Refinance: This type of refinance allows for higher loan-to-value (LTV) ratios. Most recently, FHA reform has limited such transactions to a maximum of 85 percent loan-to-value ratio and lower.

Whether you're a first time buyer or you're looking to refinance your home, an FHA loan is the way to go.

Heindrick So
Heindrick So is a mortgage consultant at a local Bay Area Real Estate Brokerage--specializing in residential wholesale lending. Heindrick frequently contributes to various finance columns, ranging from home loans and mortgages, debt management, and other personal finance topics.