FHA loans are mortgages backed by the Federal Housing Administration (FHA) so they are federally insured and provide investors a buffer for their risk so they can provide mortgages to borrowers who would not otherwise qualify under conventional lending guidelines. This insurance is paid by the borrower in the form of an up front mortgage insurance premium of 1.75% of the loan amount which is typically rolled back into the loan, and monthly mortgage insurance of .85% of the loan amount. This mortgage insurance (MI) is applied for the life of the loan unless the borrower puts down at least 10% of the sales price, in which case the MI will last 11 years and then drop off.
FHA mortgages allow for a higher debt to income ratio (DTI), a lower down payment, and lower credit scores. There are a lot of borrowers who have had hiccups with their credit or have taken on a little too much debt for conventional guidelines, but are otherwise excellent home buyers. Because of this, FHA provides a fantastic loan program to help home buyers achieve their dream of owning a home. Many first time home buyers use an FHA loan as a stepping stone as their lives and careers develop. Give me a call or send me an email and I will see if you qualify for an FHA loan. Many people who think they wouldn’t qualify are often surprised by the flexibility of this program.
To offset the MI, and because FHA loans are federally insured, FHA rates are often lower than conventional rates. The minimum down payment for an FHA loan is 3.5% and depending on the credit situation, we can sometimes go below a 620 credits score.