Columns
August 6, 2020
link to facebook link to twitter

Real Estate & Business

Scott Sheldon
All about FHA loan for 2020 and beyond
July 10, 2020

One of the most popular mortgage loan programs that continues to be popular especially amongst first time home buyers is the FHA loan. FHA loans can help bridge the gap between renting and owning and offer numerous benefits. It is prudent as an informed consumer to know the mechanics of how FHA loans work and all the pros and cons so you can best decide what is in your best interests for you and your family…

FHA loans are loans that are insured by the Federal Housing Administration which is backed by HUD. The FHA insures the loans the lender originates if the borrower does not make the mortgage payment. This insurance is paid for in two forms of extra loan costs. There is an upfront mortgage insurance premium at 1.75 percent of the loan amount typically, financed can be paid for in the form of cash. Additionally, there is a monthly premium at .85 percent of the loan amount before the 1.75 percent premium is financed.

Here is an example

Purchase price $650,000

Down payment 3.5 percent-$22,750

Loan amount $627,250

Upfront mortgage insurance premium 1.75 percent-$10,976

Financed loan amount $638,226

Annual mortgage insurance premium based on an original base loan amount of $627,250- $5,331 per year divided by 12 is $444 per month.

Important considerations when deciding to go with an FHA Loan

FHA Loans are incredibly flexible and only require a 3.5 percent down payment. You can also get an FHA loan just two years after Chapter 7 bankruptcy and three years out of a short sale or a foreclosure. This makes FHA Loans particularly favorable if you have a less than perfect credit situation.

If you put down just 3.5 percent, the PMI is permanent and you cannot get rid of the PMI unless you put down 10 percent equity and 10 years have passed and 20 percent equity and then you can petition out of the PMI at that point in time. Anything less than 10 percent down on an FHA loan, the PMI is permanent and the only way out of the PMI to sell the property or refinance into a different type of mortgage such as a conventional loan for example.

FHA loans do not contain prepayment penalties and most banks, but not all, will go down to credit scores as low as 620. Some mortgage companies such as New American funding, for example, will do an FHA loan all the way down to a 580 credit score for a purchase. Not all mortgage companies have these types of credit score requirements, so it is important that you get this information with whatever lender you are interviewing to handle your home financing needs.

FHA loans in the State of California and other states that are specifically community property states have a little nuance if you are a married couple. So if you are on the mortgage and your spouse is not and you live in a community property state, any and all debt that you have and your spouse carries is considered joint, meaning the lender has to pull a copy of the credit report for your spouse even if your spouse is not on the loan and any debt that your spouse carries will be factored into your debt to income ratio when using an FHA loan to get qualified.

FHA loans contain lower interest rates than conventional financing, you are hearing that correctly. The reason why is because the FHA loans are pricey given the extra mortgage insurance as we discussed above.  It is not uncommon right now to see some 30-year mortgages on FHA loans under three percent.

An FHA loan can, if done, be a wonderful affordable way for a family to finance a home, whether for buying a home or refinancing a home. FHA Loans are also not restricted to first time home buyers only.

 

Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.