What is FHA and What Does it Do?

The Federal Housing Administration, commonly known as FHA, provides mortgage insurance on loans made by FHA-approved lenders. It is the largest insurer of mortgages in the world, with close to 35 million insured properties.

FHA provides this insurance to protect lenders against losses due to foreclosure, which allows borrowers to get loans they might not otherwise qualify for. FHA is a government agency and is completely self-funded, which is to say that tax payers aren’t footing the bill.

Unlike a conventional loan, this insurance requires very little cash investment, because the loan itself is well-insured. Since the loan is so well-insured, the underwriting guidelines, income requirements, credit score and payment ratios are more flexible than conventional loans and are an excellent alternative in today’s tight credit market.

The loan process for FHA loans is very similar to conventional loans. This site contains a detailed description of that process.

The FHA also provides more information online.

What FHA Isn’t

FHA insured loans are not sub-prime loans. These are prime loans and do require a 620 credit score and full documentation of income and down payment. In order to get FHA insurance, guidelines have been established to insure homeowners can afford the investment.

Mortgage Insurance

Home Buyers will pay an Up-Front Mortgage Insurance Premium (UFMIP) of 1.75% of the loan amount (2.25% as of April 5, 2010). This fee is almost always financed into the loan. In addition, a monthly premium of 0.55% of the loan amount will be paid. This premium generally lasts a term of 5 years or when the loan to value reaches 78%, whichever is longer.

For example, for a $300,000 purchase price with 3.5% ($10,500) down payment, the total loan amount would be calculated as follows: $300,000-$10,500=$289,500. Add 2.25% of that amount ($6,513) to that amount and your total loan amount is $296,014. However, your monthly payment will likely be lower than a standard 5% down conventional loan because the Private Mortgage Insurance will be less per month. Call or email me for details, it gets tricky fast!

Appraisal Standards

In order to obtain FHA Insurance, the home must be deemed in good operating condition. A few key areas of concern are chipping and peeling paint (especially if it’s lead-based), loose railing systems, poor roof conditions or anything else which could affect the safety of the home owner.

Rates

Rates on FHA loans generally mirror conventional financing and are often much better because they 1) have either a very small or no credit score adjustments and 2) do not have the 0.75 point condo adjustment currently in place for all Fannie and Freddie loans with loan to values greater than 75%.

Loan Costs

FHA underwriting fees are no more or less expensive than conventional financing. On average, the fees range from $400 – $1,300 plus appraisal, title, attorney and points up to 1%. UFMIP is added to the loan amount and not generally considered an underwriting cost, rather a closing cost.

Condominiums

FHA requires that all condos are approved. FHA provides a condo lookup tool to determine the eligibility. Keep in mind that 1) generally these are developments over 4 units and 2) not all developments will enter their information into the database.

If a condominium development is not FHA approved, a DELRAP or HRAP approval will be necessary. Visit this link to read about new guidelines for DELRAP and HRAP approval.