Sunday, October 1, 2023
FHA mortgages are home loans that are insured by the Federal Government. This insurance protects the lender from losses suffered if the home goes into foreclosure. It is not the same as hazard insurance or insurances that pay in the event the borrower dies or becomes disabled.
FHA allows a buyer to purchase a home with as little as 3.5% down. They tend to be more lenient on areas such as credit, funds to close and coborrowers. Example FHA: Loan amount $300,000, 3.5% down, monthly payment without taxes and insurance $1,501.74, APR 5.395%, FHA monthly MI is $211.00.
Most loans use a method of analyzing credit called credit scoring in the underwriting process. Studies have demonstrated a direct relationship between low credit scores and higher mortgage delinquency rates. As a result many lenders have established minimum credit scores at which they will accept loans. Unfortunately, a lack of credit, old delinquencies or incorrect information on the credit report can cause a low credit score. FHA does not have specific credit score requirements. Although a high credit score may assist in getting the home mortgage approved, a low score is not automatically cause for denial. If the credit scores are low, then it is up to the borrower to demonstrate his/her ability and willingness to pay the loan back. This allows the borrower to explain the circumstances surrounding the credit difficulties and have that explanation considered in the underwriting process. The underwriter on an FHA loan will review the credit and payment history of a customer concentrating on the most recent 12 to 24 months. If the customer has had a good payment record over the past 12 to 24 months they can often get approved for a home mortgage even when Conventional financing has turned them down. An experienced loan officer can help the customer clearly tell their story and will often make suggestions as to how to make the file more acceptable to FHA. Because of FHA's leniency, some borrowers with past credit problems elect to use FHA for loans when they have a substantial down payment rather than getting a higher interest rate conventional loan.
The interest rate that you select will also have a bearing on the total costs. If you select a lower rate so that you can reduce your payment, you may end up paying additional money towards a "discount fee". At the same time if you are comfortable with a slightly higher payment you may find a mortgage lender that is willing to reduce the costs to close in favor of a higher interest rate.
FHA allows the borrower to get the funds necessary to close from several sources. They include such areas as personal savings, gifts, grants, loans from retirement accounts and seller contributions.