The FHA Loan Basics

Posted by Nick Niesen on October 29th, 2010

FHA loans are a great option for anyone looking to buy a home with little money for a down payment. In general, FHA loans require only a 3% down payment. In addition to the low down payment, there are several aspects of FHA loans that can help you decide if an FHA loan is the best option for you.

The basic FHA loan, 203(b), can be used to finance the purchase of a new or existing, one- to four-family, owner occupied, dwelling. This means that an FHA loan could be used for places such as condominiums, townhouses, duplexes, or traditional homes as long as the residence is being used as the borrower?s residence.

There is also a 203(k) loan, which is available to rehabilitate an existing residential dwelling. This loan allows the borrower to receive a loan based on the appraisal of the property with specified improvements. There are a variety of repairs and improvements that could be covered by this type of loan, including replacing floors, tile, carpet, roofing, siding, plumbing, electrical work, major landscaping, and patios. Mortgage payments can be postponed up to six months while repairs are being completed if the residence is uninhabited. Tax or insurance payments may still be required during this time period.

The amount provided by FHA loans is limited by the median house price in a region as well as the FNMA and FHLMC loan amounts. To see what the loan limits are for your area, you can go to https://entp.hud.gov/idapp/html/hicostlook.cfm.

FHA loans can have fixed or adjustable rates. FHA ARM loans have the same qualification guidelines as fixed-rate mortgages. They also have an interest-rate increase cap of 1 percent per year and 5 percent over the life of the loan.

Mortgage insurance premiums (MIPs) are required with FHA loans. There are two types of MIPs associated with FHA loans: initial premiums, which are paid at the time of closing, and renewal premiums, which are paid as part of the monthly payment. The rates charged are based on the terms of the loan and the amount of the down payment. The MIPs renewal premium is dropped when the equity reaches 22%.

In addition to these FHA basics there are many details which are important to understand. A great resource is a good lender. The FHA has given certain status to lenders that can underwrite and approve FHA loans. These lenders have a Direct Endorsement or DE. Making sure that your lender has their DE will ensure more efficient handling of your loan and your questions.