FHA Mortgage
During the great depression of the 1930s, the government stepped in and came with an innovative loan to help the banking industry recover, thus putting the whole economy back on track. FHA stands for Federal Housing Administration, so FHA loans, by definition, are home loans backed by government insurance. In this way, lenders are protected in the event of a foreclosure. Since lenders are insured against loss, FHA encourages them to generate loans that otherwise would have been deemed too risky. Today, FHA loans are a last resort for low-income households, who otherwise would have to rent.
So, an FHA mortgage is the best choice for people with a low credit score and very little savings for a down payment. The ideal FICO® credit score for this type of loan is 580 which allows a down payment of only 3.5%. For credit scores between 500 and 579, the down payment raises to 10%. Higher credit scores could offer lower interest rates and a conventional mortgage might be cheaper over time.
A very important indicator taken into consideration is the debt-to-income (DTI) ratio. It should be lower than 43%, but ideally, a family shouldn’t spend more than 30% on housing. Be aware that the home financed through an FHA loan must be the primary residence, so no FHA loans for vacation homes or investment properties.
The private mortgage insurance is going to increase the total cost of the loan and is not negotiable. For some loans, it must be paid during the whole life of a loan, while for other loans, it may no longer be required once the borrower repays 78% of the loan or makes at least five years of payments. The first premium is paid upfront, and is 1.75% of the loan and is usually included in the loan amount. Then, borrowers have to pay a 0.85% premium every year.
FHA loans give a second chance to homeownership to those who have filed for bankruptcy or have defaulted on a previous loan. After filing a Chapter 7 bankruptcy, at least two years shall pass before applying for a new mortgage. Foreclosures result in a three-year waiting period, but it is still shorter than the seven-year waiting period imposed for conventional loans.
FHA loans have the advantage that they can be assumed by a qualified buyer. It is possible to sell a house with an FHA mortgage at a rate below the current market by allowing the buyer to assume the old mortgage, while conventional loans carry due-on-sale clauses that require the loan to be repaid when the house is sold.
Popular Mortgage Terms
The longest period for which the lender will lock the rate and points on any program. On most programs, the longest lock period is 90 days; some go to 120 days and a few to 180 days. It ...
The process of determining whether a prospective borrower has the ability to repay a loan. Qualification Versus Approval: To be approved for a loan, a prospective borrower must ...
The rate charged the borrower each period for the loan of money, by custom quoted on an annual basis. A mortgage interest rate is a rate on a loan secured by a specific property. ...
A transaction in which interest is not paid on interest there is no compounding. For example, if you deposit $1,000 in an account that pays 5% a year simple interest, you would receive ...
An option exercised by the borrower, at the time of the loan application or later, to 'lock in' the rates and points prevailing in the market at that time. When lenders 'lock/' they ...
The ratio of total housing expense to borrower income. This ratio is used (along with other factors) in qualifying borrowers. ...
A government-owned or -affiliated lender that makes home loans directly to consumers. With minor exceptions, government in the U.S. has never loaned directly to consumers, but housing banks ...
The sum of all interest payments to date or over the life of the loan. This is not a good measure of the cost of credit to the borrower because it does not include upfront cash payments and ...
Trying to find the best deal on a mortgage. It isn't easy to do right, as a summary of the major steps involved will demonstrate. Step 1: Decide if you are a potential shopper. Step 2: ...
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