When you are considering the purchase of a house you have several options for funding the purchase. This is the first of a multi-part blog about different forms of financing.
In this first session I will discuss FHA loans. The Federal Housing Administration is an agency within the Department of Housing and Urban Development (HUD.) There are many huge advantages in using FHA for your loan.
HOW MUCH MONEY DOES FHA LOAN
Absolutely none! Hey, wait, I thought they were a loan program? FHA is an insurance plan, not a lender of money. They insure the loan provided by another institution/lender if the loan meets certain criteria. This insuring of the loan decreases the risk for lenders.
WHY CHOOSE FHA
- Low down payment, as low as 3.5%
- The loan amount can be up $697,500
- Gift money (money from other sources like parents) is allowed
- A non-resident person (who will not live in the house) can be a co-signer
- You need little upfront cash as compared to some other loans
- Good if you have limited or non-traditional credit
One great reason to choose FHA is if you have a challenge with your FICO credit score. With a FICO of over 600 you could qualify for a 3.5% down payment loan. If your FICO score is between 580-599 then down payment requirement goes up to 5%. If your FICO score is between 500-579 then down payment requirement is only 10%. (These figures are believed accurate as of the time of writing but not guaranteed. The program can change without notice. Consult a loan professional for current requirements.)
Another advantage of a FHA loan is the ease of use of gift money. In many loans, you cannot receive gift money to help you purchase the home. Gift money is just that, it is a gift and not something you receive on a regular basis like a job. A FHA loan allows for gift money. Gift money can come for a person; for example, your parents. Gift money can also come from an event; for example, a bridal registry or bridal money dance.
FHA OPTIONS
- 15 and 30 year fixed rate loans
- 3/1, 5/1 hybrid Adjustable Rate Mortgages (ARM)
What is a 3/1 or 5/1 ARM? ARM stands for Adjustable Rate Mortgage. It does exactly what it sounds like it will do. Over the life of the loan the rate will adjust to reflect current market conditions. There are some safeguards; namely, in a FHA ARM the rate can only go up or down 1% maximum.
The 3/1 designation means what your introduction rate will be fixed for 3 years and then after that will adjust every year. The benefit of the ARM is that the initial interest rate is lower then fixed rate loan. At the time of the writing of this article the fixed rate interest is at 4.75% while a 3/1 initial interest rate is 3.5%. There are advantages and challenges to fixed rate and ARM; be sure to consult a professional loan arranger to understand all the ins and outs.
ELIGIBILITY
- US Citizen, lawful permanent resident alien (non-permanent can qualify if additional criteria are met.
- DO NOT have to be a first (1st) time home buyer
- You may only have 1 mortgage
There may be additional qualification based on your unique situation. As always, I recommend that you speak to a loan professional to examine your case and advise you properly.
MORTGAGE INSURANCE
As I mentioned above, FHA is not a lender of money but rather insures the loans provided by a lender. Of course, this insurance, as with any insurance, is not free. For a FHA loan your payment for this insurance is called MI (Mortgage Insurance.)
Currently the insurance rate is .85% to 1.15% of the amount loaned. The exact rate is determined by the Loan to Value ratio (LTV.) The insurance premium is paid monthly; consider it part of the loan payment you will need to make each month.
Over the life of the loan the requirement for you to pay MI may be cancelled. This occurs when then LTV reaches 78% and you have been paying your MI for at least 5 years.
(If your loan is for less then 15 years there are different insurance rates and requirements for MI. Consult your loan professional for those figures. Please note, MI is not a homeowner’s insurance policy. MI is separate from the required homeowner’s insurance policy you will be required to obtain.)
CONCLUSION
There you have the bird’s eye view of FHA Loans. This is not an in depth study of FHA loans but should give you a good feel for FHA loans. A loan professional can help you understand everything about FHA loans.
Another consideration for loans is the VA loan.
Did you know that in San Diego you could qualify for a 0% down loan? Visit this page for more information about this exciting program.
*Disclaimer – David Cairns is a real estate professional serving San Diego, California and is licensed by the State of California only under CA DRE lic #01890743. All information on davidcares.com is for informational purposes. Information regarding short sales, foreclosures, buying homes, selling homes or any other information is general in nature and is not intended or should be construed as legal, tax, or other advice. Every person has a unique situation; I would be happy to talk to you regarding real estate matters. You must consult a legally qualified person for advice in all other areas before taking any action. I can be contacted at david@davidcares.com
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