FHA loans offer home buying borrowers lower down payment options and lower lending standards than conventional lenders. These are “huge attractions” to low-mid tier and first time buyers, according to Dennis Geist, the senior advisor with Treliant Risk Advisors.
Here’s how FHA mortgage loans compare with conventional mortgages.
FHA Average Conventional FHA loan
Credit Score
Minimum 620 500
Down Payment 5-20% 3.5% (580+
Score)
10% (500-579
Score)
Loan Terms 10,15,20,30 years 15-30 year
Premiums PMI: 0.41%/year upfront 1.75% loan amount
0.45-0.85%
annual
Interest Type variable/fixed fixed
FHA borrowers do not need perfect credit scores. It’s always best for your clients to check their scores before they borrow. Your clients can check for no cost at myBankrate.
Borrowers can use their own savings, a cash gift from a family member or a grant from a state/local government down payment assistance program to make their down payment. Remember that FHA loans with a minimum down payment of 3.5% are available for borrowers with credit scores of 580+.
The FHA allows home sellers, builders, and home lender to pay some closing costs (appraisals, credit reports, title expenses) on behalf of borrowers as incentives for them to buy new homes.
Since the FHA is an insurer, not a lender, borrowers must seek FHA approved lenders. Again, it’s important that borrowers shop for and compare their loan offers in order to get the best rates, even on the same loans.
The FHA requires two mortgage insurance premiums. One is an upfront premium. It is 1.75% of the loan amount and can be paid either when the borrower obtains the loan or can be financed as part of the loan amount. The second mortgage insurance is the annual premium. Paid monthly, annual premiums are based upon the length of the loan, the loan amount and the initial loan-to-value (LTV) ratio.
The FHA allows borrowers to borrow cash for repairs. These so-called streamlined loans, 203 (K) loans offer up to $35,00 for non-structural repairs. Loans are based upon the projected value, not the appraisal value, of the home after the repairs are completed.
FHA “ceiling” and “floor” limits are based on the cost of living specific to the location of the home. Ceiling limits have been raised to $679,650 in 2018 and floor limits have been raised to $294,515 in 2018. The FHA makes exceptions for Alaska, Hawaii, Guam and the Virgin Islands due to higher construction costs.
Lastly, the FHA allows financial hardship relief for its borrowers. That relief can be in the form of loan modifications, a temporary period of forbearance, an extension of the payback period or a deferral of the loan.
