The days of many diffent types of loans has come and gone and there are about 2 or 3 different kinds of mortgage loan types that exist for the average person. The most common one now a days (which wasn’t the case in the past) is the government loan by the FHA (Federal Housing Authority). Although, not 100% financing it’s pretty close to it.
FHA Loans whether in Charleston, SC or wherever in the U.S. are pretty much the same everywhere. What makes an FHA loan different than say a conventional or jumbo loan?
What is an FHA loan?
It’s misleading as the Federal Housing Administration loans are not loans at all, but a government agency insures the loans so that lenders can offer mortgage assistance to people with:
Have fair or poor credit
Have a low down payment (must have at least 3.5%)
Have undergone bankruptcy
Have been foreclosed on
So in essence, the federal government insures loans for FHA-approved lenders or banks so that lenders reduce their risk of loss if they lend to borrowers who might default on their mortgage obligations. The FHA program has been in place since the 1930s to help stimulate the housing market by making loans accessible and affordable. In the beginning, FHA loans were designed to help military families who return from war (then came VA), the elderly, handicapped, or lower-income families, but really, anyone can get an FHA loan – they are not just for first-time home buyers.
Are there any down sides to FHA loans?
Since an FHA loan does not have as strict of standards of a conforming loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront OR, it can be financed into the mortgage — and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser. As long as the appraiser is licensed in the state of South Carolina.
- Upfront mortgage insurance premium (MIP) — Appropriately named, this is an upfront monthly premium payment, which means borrowers will pay a premium of 1.00% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.00% = $3,000. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage.
- Annual MIP (charged monthly) — Called an annual premium, this is actually a monthly charge that will be figured into your mortgage payment. It is based on a borrower’s loan-to-value (LTV) ratio and length of loan. There are two different Annual MIP values: 0.85% and 0.90%. If the LTV is less than or equal to 95 percent, a borrower will pay 0.50%. For LTVs above 95 percent, annual premiums will be 0.90%. Example (for LTV less than 95%): $300,000 loan x 0.90 = $2,700. Then, divide $2,700 by 12 months = $225. Your monthly premium is $225 per month. To understand when you will stop paying mortgage insurance:
- For mortgages with terms more than 15 years, the MIP will drop off after five years (in most cases) or when the remaining balance on the loan is 78 percent of the value of the property — whichever is longer.
- For mortgages with terms 15 years and less and with LTV ratios of 90% and greater, the MIP will stop when the LTV ratio reaches 78% — no matter what length of time the borrower has paid the MIP.
- For mortgages with terms 15 years and less and with LTV ratios of 89.99% and less, you will not be charged MIP.
- Property needs to meet certain standards — Also, an FHA loan requires that a property meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).
What is mortgage insurance for: This is a safety net for the FHA to recoup some of the loss that is incurred with a percentage of homeowners default on their loans. Basically, the government is subsidising it’s expected shortfalls of some borrowers with the mortgage insurance payments of the good borrowers.
What does it take to qualify for an FHA loan? Not really much more than a conventional loan. What you’d expect to have to have to qualify for any loan really.
- Good Credit - credit score is between 500 and 579
- Proof of regular, steady employment for at least 2 years
- Proof of adequate income
- At least 3.5% down payment
- At least 2 year of good rental or mortgage history
- Debt to income ratio of 43% or less
- Acceptable property and proper Appraisal
- 2 years out of bankruptcy and 3 years out of foreclosure