Definition and Examples of Federal Housing Administration Loans
Federal Housing Administration (FHA) loans are issued by private lenders but are insured by the FHA. Because they are backed by the FHA, these loans make homeownership accessible to low- or moderate-income buyers who may struggle to get approval from traditional lenders.
How Do Federal Housing Administration Loans Work?
The FHA guarantees that it will pay the lender in the event of a borrower defaulting on their loan. The Federal Housing Administration charges borrowers insurance in two different ways to fund this commitment: buyers using FHA loans pay an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount. You can pay the UFMIP fee at the time of the loan closing, or it can be added to the total loan amount that you borrow on your mortgage. Homeowners also pay monthly mortgage insurance premiums (MMIP), which is a percentage based on the level of risk the FHA takes on your loan. Shorter-term loans, smaller balances, and larger down payments receive lower MMIP premiums. These rates can range from 0.45% to 1.05% annually. Most borrowers with small down payments and 30-year loans pay a rate of 0.85%.
Alternatives to Federal Housing Administration Loans
It may be better for you to obtain a conventional home loan if you have a credit score of 620 or higher and a debt-to-income ratio of 50% or less, and if you can afford to put 20% down or more. Putting at least 20% down on your home will eliminate the need to pay mortgage insurance premiums.
Advantages and Disadvantages of Federal Housing Administration Loans
The main advantage of Federal Housing Administration loans is that they make lenders more willing to grant mortgages to low- and moderate-income borrowers due to the FHA’s guarantee covering the payments. However, there may be some drawbacks associated with this type of loan.
How to Get a Federal Housing Administration Loan
You may start at
Source: https://www.thebalancemoney.com/fha-loan-basics-315656
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