The FHA, or Federal Housing Administration, is a federal govenrment entity that provides mortgage insurance to approved lenders thourghout the United States. They offer several programs which allow borrowers to buy a home with a smaller down payment than other loans, making it easier for buyers to qualify for a mortgage.
Some FHA loans require as little as 3.5% down payment, making them appeailing to prospective buyers. To qualify for an FHA loan you will need the following:
- Steady employment for at least 2 years
- Valid Social Security number
- A minimum down payment of 3.5% to 10% (This may be gifted by a family member) depending on your credit score (some may not qualify)
- Appraisal from an FHA-Approved Appraisor
- Must be 2 years out of bankruptcy with good credit
- Must be 3 years out of foreclosure with good credit.
There are, however, several drawbacks to FHA loans. For instance, FHA requires an Upfront Mortgage Insurance Premium.This one time fee is assesed when the loan is closed and is 1.00% of the loan amount. For example, a loan of $150,000.00 would require a premium of $1500.00.
They also require an Annual Mortgage Insurance Premium, which is paid monthly with your loan payment. This premium will vary based on the amount of the loan and the value of the property. A quick estimate of the annual MIP can be calculated by multiplying the loan amount, minus the up-front MIP, times the annual MIP rate of 0.90 percent. The annual MIP is recalculated each year using the end-of-year loan balance plus the balance after the next 11 payments. The MIP amount will decrease each year as the loan balance is paid down.
Example:
Loan amount of $300,000 has an up-front MIP of 1.00% = $3,000.00
Deduct the up-front from the loan amount = $297,000.00
Mulitply by the current estimated MIP rate, 0.90% = $2673.00 annually or $222.75 per month.
This may seem confusing, but the professionals at Lexington Mortgage Funding are here to help you understand these valueable programs.
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