What Is An FHA Loan?
The Federal Housing Administration, generally known as "FHA", provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family homes, multifamily properties, residential care facilities, and hospitals. It is one of the largest insurers of mortgages in the world, insuring more than 46 million mortgages since its inception in 1934.
- Housing and Urban Development
FHA Loans
The FHA loan is a loan program designed to make borrowing money for the purchase of a residential property easier for the average person. The main selling points for using an FHA loan are as follows;
Minimum FICO score required is 580 and above
Minimum down payment is 3.5% of the purchase price
The interest rate is typically lower than with other loan programs
Optional: If you find a home that needs a little bit of work, FHA allows for the borrowing of extra funds to help fix it up
The loan limits in Los Angeles and Orange County are very forgiving and allow for a much higher loan limit if you qualify for it.
You may be asking yourself why a lender would be willing to fund a loan with these kind of requirements. It’s simple, the Government insures the loans so that in the case of hardship, the government repays the balance of the loan to the lender. This security is what allows private banks to work with these guidelines. Each of the bullet points above will be expanded upon next.
Down Payment
The 3.5% minimum down payment is one of the lowest in the industry. If you were to buy a $400,000 home in the City of Ontario, this means your down payment would only be $14,000! This is much easier to save for than the 20% down payment you hear advertised on the radio and TV. A small initial investment in your home makes you a home owner sooner rather than later, and getting in the game early is more advantageous for you. A quick explanation for this, home prices in California raise over time. The overall general trend is up.
If you were to buy a home now at $400,000, the home you buy would more than likely be worth 5% more in a few years time. If you were to wait to build up more of a down payment (not a bad idea at all) that same home would have gone up 5% and you would have to pay $420,000. I don’t know about you but I would rather have built equity in that time than pay more for the same thing.
The low minimum down payment is designed to help you buy a home sooner rather than later
Credit Score
With that 3.5% down payment, you could have a credit score of 580 and you’d be able to qualify for that home loan. If you are willing to put 10% down, your minimum qualifying credit score could be as low as 500. The purpose of this requirement takes into account that life can throw curve balls at you. Sometimes those curve balls hit hard and you are forced to borrow money you don’t have, negatively affecting your credit score. The Government insured FHA program is there to help with that. If you’re on the fence because of this one factor, there are solutions to make home ownership a reality.
Interest Rate
The interest rate for an FHA loan program has historically been lower than that of conventional loans. With the historically low rates we’ve been seeing lately, the difference may not be as drastic as it once was. Although the difference is minimal, the low down payment requirement is the main positive factor going for the FHA loan. Even a few basis points lower will save you money in the long run.
How FHA Loans Work
FHA loans are a great option for home buyers, but there are costs and we will briefly go over them here. The FHA promises to repay lenders if a borrower defaults on an FHA loan. To fund that obligation, the FHA charges borrowers (that’s you) a fee.
Home buyers who use FHA loans pay an upfront mortgage insurance premium (MIP) of 1.75 percent.
Borrowers also pay a modest ongoing fee with each monthly payment, which depends on the risk the FHA takes with your loan. Shorter-term loans, smaller balances, and larger down payments result in lower monthly insurance costs. Those charges range from 0.45 percent to 1.05 percent annually. Most borrowers with a small down payment and 30-year loan pay 0.85 percent (or 85 basis points).
FHA loans are available for multiple types of properties. In addition to standard single-family homes, you can buy duplexes, manufactured homes, and other types of properties.
We mentioned Loan Limits above for Los Angeles County and Orange County. These counties are considered high cost counties and as such are allowed higher loan limits. San Bernardino County and others are not considered high cost so their loan limits are typically lower. If you qualify for a $600,000 loan in Los Angeles County, that same loan would work in San Bernardino County but the loan limit will cap you at $431,250. This means you would be on the hook for the difference and that would have to be out of pocket. If you’re curious about what the loan limits are in other counties, check them out HERE.
In Conclusion
FHA loans are great to help you get into that home today, but there are come caveats to watch out for. As your preferred lender, we provide options to help you keep those costs low and make home ownership more manageable. If we find that you’re eligible for a better loan program, you can bet your bottom that we would show it to you and explain why you’d be a better fit for that loan program. American Freedom Funding is here for you and we stand by that by providing YOU the option to choose. If you have questions about FHA programs, or about any loan program, feel free to reach out to us. We would be happy to help educate you so that your decision is a well informed one.