Congress created the Federal Housing Administration in 1934. This was to assist more potential buyers in obtaining a home of their own. With an FHA loan, the government insures the loan which allows for lower down payments and often easier approvals for the buyer. Loans insured by FHA are ideal for first-time home buyers or borrowers who cannot afford a conventional down payment. These mortgages are funded by a lending institution, such as Box Home Loans, and the mortgage is then insured by the Federal Housing Administration.
In order to qualify for a FHA loan, borrowers need a 3.5% minimum down payment. This is a main selling point for FHA loans as conventional loans require at least 5%. For example, lets say a borrower is using a FHA loan to purchase a $200,000 home. The borrower would need a down payment of $7,000 compared to $10,000 required for most conventional loans. Furthermore, conventional loans require the 5% down payment to be the borrower’s own documented funds. Whereas, the 3.5% down payment required for a FHA loan can be a gift from a relative, close friend, or charitable organization.
FHA loans are subject to paying upfront and monthly mortgage insurance. FHA requires a one-time mortgage insurance premium of 1.75% of the total loan amount paid upfront and monthly mortgage insurance payments paid in addition to the mortgage payment. The Loan to Value ratio is critical in determining how long the borrower will pay monthly mortgage insurance. LTV is the ratio of the loan amount in comparison to the home’s appraised value. If the loan’s LTV is above 90%, the borrower will pay monthly mortgage insurance for the life of the loan. If the loan’s LTV is 90% or below, the borrower will pay monthly mortgage insurance for 11 years.
FHA loans can offer lower down payments, lower closing costs, and more lenient underwriting qualifications for borrowers. If you have any questions or concerns about potentially obtaining a FHA loan, please don’t hesitate to contact us.