Is an FHA Loan Right for Me?

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With an FHA loan, home buyers can take advantage of low minimum down payments, lenient credit score requirements and flexibility when it comes to rate and term structure. But FHA loans may not be the ideal home financing solution for everyone. In today’s post, we’ll review FHA mortgages and their benefits, as well as potential drawbacks.

What is an FHA Loan and what are its benefits?

FHA loans are government-backed mortgages designed to help the average American purchase a home with affordable terms. They feature low down payments (typically 3.5%) and allow gift funds to be used toward the down payment, making them more accessible than many other conventional loan products in today’s market.

In addition to the attractive down payment features, FHA loans are available in a variety of term structures. For instance, you can get a 30 year fixed rate FHA mortgage, which features an interest rate that will never increase and a long term to help keep your payments low, or you can opt for a 5/1 adjustable rate FHA mortgage, which features a low introductory interest rate for the first five years and then is subject to adjustment once a year for the remainder of the loan. We also offer a 15 year fixed rate FHA mortgage option, for home buyers who want to significantly save on interest over the life of the loan and pay off their principal balance sooner.

FHA loans can also be used for homes that need repairs or remodeling. The FHA 203K loan program allows qualified borrowers to finance the purchase cost as well as the cost of certain improvements. This program can also be used as a refinancing tool for a home you already own.

As you can imagine, the possibilities are vast when it comes to FHA home financing. This, and their accessibility to a wide selection of home buyers and home owners makes FHA loan products extremely popular.

What are the potential drawbacks?

Upfront FHA Mortgage Insurance Fees

FHA loans aren’t necessarily the most affordable option in today’s mortgage marketplace. Although they allow as little as 3.5% down, most FHA borrowers will have to pay additional fees in the form of FHA mortgage insurance to help protect lenders and the FHA program from loss, in the event that the borrower stops making their payments.

Unlike conventional mortgages, which typically require private mortgage insurance (PMI) on loans that have greater than 80% LTV (when borrowers make a down payment of less than 20 percent), FHA mortgages require two separate mortgage insurance premiums. The first premium is an upfront fee paid at closing. The up front mortgage insurance premium (UFMIP) is 1.75% of the loan amount and can be financed into the loan, saving the borrower from having to pay out of pocket.

Annual Mortgage Insurance Fees

The second premium is the annual FHA mortgage insurance premium (FHA MIP). This premium is calculated annually; however, the homeowner pays the fee on a monthly basis as part of their mortgage payment. The FHA MIP rate is determined by the borrower’s loan term and down payment (ask your mortgage lender for details).

Inability to Cancel Mortgage Insurance

Unfortunately, FHA borrowers cannot cancel their FHA MIP. The only way to get rid of this additional fee is to refinance into a non-FHA mortgage loan, which may or may not be worth the cost.

With a conventional mortgage, borrowers who cannot make at least a 20% down payment are subject to paying private mortgage insurance (PMI); however, their lender can cancel this premium once the borrower has acquired at least 20% equity in the home. Therefore, if a borrower’s sole reason for considering an FHA loan is the lower down payment, a conventional mortgage may make more sense.

So how do you determine if an FHA mortgage makes sense for your situation? Take a look at the following statements. If some of these apply to you, then an FHA loan may be a great option.

An FHA Loan may be right for you if…

  • You don’t have enough money for a 20% down payment
  • Your credit score is less-than-perfect
  • You plan to use money that has been gifted to you for your down payment
  • You don’t mind making larger monthly payments in order to avoid paying a high amount up front

Remember to consult with a qualified FHA mortgage professional before making a decision and be sure to weigh the benefits and risks of other options. Ready to speak with a loan professional today? Feel free to connect with the Mid America Mortgage, Inc. team by calling (866) 544-7013 or simply fill out the form on this page and one of our loan consultants will reach out to you.

 

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