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Do I Qualify for an FHA Home Mortgage Loan?

Find out what an FHA loan is, who qualifies for one, and the pros and cons of 3 different kinds of FHA loans.

By
Laura Adams, MBA,
November 20, 2013
Episode #335

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What Are the Types of FHA Mortgage Loans?

There are many different types of FHA loans, including programs for first-time home buyers, disaster victims, energy-efficient renovations, Indian Reservations, condominiums, manufactured homes, refinancing, and urban renewal projects.

But here I’ll focus on 3 types of FHA loans that you might use for purchasing or refinancing a principal residence: a 203b, 203k, and the Short Refinance Mortgage.

FHA Loan Type #1: 203b Home Mortgage Loan

The 203b Home Mortgage is considered the centerpiece of FHA’s single family program. It was designed to help Americans, who wouldn’t normally qualify for a conventional mortgage, buy or refinance a primary residence.

There are 3 major benefits of a 203b loan:

  1. Your down payment can be as low as 3.5%. Most conventional mortgages, on the other hand, require you to pay 5% to 20% of the price of the home.  
  2. Your fees are limited. There are caps on some of the fees that mortgage lenders can charge.
  3. You don’t need excellent credit. As I previously mentioned, you may get approved even if your credit has a rocky past.

The amount you can borrow with an FHA loan has limits, depending on where you live. For more information, you can search by city, county, or state using the FHA Mortgage Limits tool.

FHA Loan Type #2: 203k Rehabilitation Mortgage Loan

The 203k Rehabilitation Mortgage allows homeowners and home buyers to finance up to $35,000 for repairs or upgrades. This program gives you cash to pay for improvements, such as necessary repairs found by a home inspector or an FHA appraiser.

For instance, if you’re a homeowner, you could use the funds to prepare your property for sale. Or if you’re ready to buy a home, you could use the extra money to make repairs, like painting, installing new flooring, or upgrading the kitchen, to meet FHA standards before you move in.

FHA Loan Type #3: FHA Short Refinance Mortgage Loan

The FHA Short Refinance Mortgage is designed for homeowners who are underwater, which means you owe more for your mortgage than your home is worth.

To qualify for the FHA Short Refinance you must:

  • be current on your existing mortgage payments
  • occupy the property as your primary residence
  • not have poor credit
  • not have a history of certain kinds of criminal activity
  • have a loan that isn’t insured by the FHA or VA (Department of Veterans Affairs)

Here’s how it works: your existing lender must agree to forgive some of your debt so you owe no more than 97.75% of your home’s current value.

For instance, let’s say your home is worth $300,000, but your outstanding mortgage balance is $325,000. If your lender is willing to reduce your debt from $325,000 to $293,250 (which is 97.75% of $300,000), then you may be eligible.

The FHA would pay off your existing loan at the discounted balance, and issue you a new FHA loan. For more information, contact your existing lender or any FHA-approved lender.

What Are the Cons of an FHA Mortgage Loan?

Everything I’ve mentioned about FHA loans sounds great, so what’s the downside? Well, the major con is that an FHA loan may cost more than a conventional mortgage.

You typically have to pay both an upfront and an annual mortgage insurance premium (MIP):

  • An upfront MIP cost 1.75% of the home loan. For instance, if you borrow $300,000, you must pay $5,250 ($300,000 x 1.75%). It can be paid in full upfront, or added to your mortgage balance. This MIP applies no matter your loan amount or term.
     
  • An annual MIP is divided by 12 and added to your monthly mortgage payment. It could range from less than one half of a percent to the current maximum of 1.55% of the loan amount. How much and how long you have to pay the annual MIP depends on the originating date of your loan, the amount, and your loan-to-value ratio.

Should You Get an FHA Mortgage Loan?

The bottom line with an FHA loan is that it’s loaded with hefty mortgage insurance premium fees. However, because of that insurance, lenders may offer lower interest rates and much more flexible qualification requirements. But not all FHA-approved lenders are alike; they may offer different rates and fees, even for the same loan. 

Paying for a mortgage may be the largest expense of your life. So before you sign a mortgage commitment, do your homework and shop around.

Compare what you would pay for an FHA product against the cost of a conventional loan. And never be afraid to ask different lenders lots of questions so you make sure that you’re getting the best possible deal.

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Real estate help image courtesy of Shutterstock.

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