The FHA government agency, created partly by the National Housing Act of 1934, has kept its less stringent lending guidelines to help prospective homeowners who are unable to qualify for conventional financing.
Some lenders consider FHA's guidelines so easy to qualify that they will override the lending standards with their own rules to make it more rigid. This act is called a lender overlay in order to minimize risk that their loans go into default. An FHA loan is not just a program for borrowers denied conventional financing. When compared to a coventional loan, it can sometimes be the better choice.
This type of loan offers an excellent interest rate and sometimes is a better option than conventional loan. FHA's mortgages are insured by the Federal Housing Administration (FHA) and require a down payment of only 3.5% when you have a 580 minimum credit score.
FHA Loan Advantages
Seller closing cost contributions
Numerous mortgage programs have various restrictions on how much the seller can contribute toward the buyer's closing costs. The normal allowed is 3-percent. Homebuyers using an FHA loan are permitted get a maximum of six percent of the purchase price credited toward closing costs.
FHA loan limits
Most mortgage programs limit their loan sizes with many of their limits being tied to local housing prices. Loan limits are higher in Alaska, Hawaii, the US Virgin Islands and Guam, as well as for duplexes, triplexes and four-plexes. Remember, 3 1/2 percent down can be used for two- to –four units.
• Conforming: $484,350 to $726,525 (in high-cost areas)
• FHA: Single unit homes: $314,827 to $726,525
• Duplex: $403,125 to $930,300
• Triplex: $487,250 to $1,124,475
• Fourplex: $605,525 to $1,397,400
Lower Credit Scores
FHA's minimum credit score is the lowest at 580 if you are putting 3.5-percent down. If your credit score is below that, you'll need a 10-percent down payment. A large majority of lenders will not offer FHA loans for borrowers with a credit score below 580. We do have this program.
Who Should Consider FHA Financing?
The advantages of an FHA loan makes it attractive for borrowers who:
• Have FICO scores under 660
• Have a stable income
• Have a down payment of 3.5 percent (can be a gift for 100% financing)
• Want to buy a two- to -four-unit property and live in one unit
• Are not buying in a rural -zoned location
• Are not eligible for VA financing
Reasons to consider other types of loans
The major disadvantage of FHA, and it's a big one, is the mandatory mortgage insurance. Borrowers must pay for upfront insurance equal to 1.75 percent of the loan (which is normally added to the loan), and then there's the premium due ever year of "0.85" percent for the majority of loans. FHA mortgage insurance coverage does not ever expire, no matter what your loan balance is or how long you've owned the property.