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FHA loans can offer low interest rates and less strict loan requirements than other government backed loans. They are backed by the Federal Housing Administration and will require borrowers to pay for mortgage insurance.
Mortgage insurance premiums
Two mortgage insurance premiums are required on all FHA loans: The upfront premium is 1.75% of the loan amount — $1,750 for a $100,000 loan. This upfront premium is paid when the borrower gets the loan. It can be financed as part of the loan amount.
The second is called the annual premium, which is paid monthly. It varies based on the length of the loan and is controlled by the loan amount and the initial loan-to-value ratio. The following premiums are for loans of $625,500 or less.
Annual premiums for FHA loans
30-year loan, down payment (or equity) of less than 5 percent: 0.85%
30-year loan, down payment (or equity) of 5 percent or more: 0.80%
15-year loan, down payment (or equity) of less than 10 percent: 0.70%
15-year loan, down payment (or equity) of 10 percent or more: 0.45%
Not scared yet? Read on there are many perks!
Credit requirements
Generally, credit scores below 500 will not be eligible for a FHA loan. For credit scores 500-579, borrowers will be required to make a minimum down payment of at least 10%. For borrowers with credit scores of 580 or higher, borrowers can get a mortgage with a down payment as low as 3.5%.
There is also the first-time home buyer savings here. Read more here!
Ability to reduce closing costs and borrow for repairs
While lenders will charge a higher interest rate for loan, borrowers using FHA loans can have their closing costs paid. You can also borrow cash up to $35,000 for any non-structural repairs since the loan is in the form of a 203(k), which projects the value of the home after repairs are completed.
Loan modification for financial hardship
Life happens. If you find yourself in a financially compromised position, FHA loans allow borrowers may receive a temporary modification to lower the interest rate, extend the payback period, or defer part of the loan balance.