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FHA Loans

Another type of government-backed mortgage is the FHA loan. Congress created the Federal Housing Administration, or FHA, in 1934. It is now housed within the Department of Housing and Urban Development, or HUD.

FHA also guarantees to the lender a certain portion of the mortgage amount should the loan default. The agency has a fee — similar to the VA funding fee — called the mortgage insurance premium, or MIP. The MIP is calculated at 1.50 percent of the loan and may also be included in the loan amount.

Although there is a minimum down payment for FHA loans, the minimum investment is just 3.50 percent.

FHA loans are easier to qualify for than conventional loans due to the lower down payment and relaxed income and credit guidelines. Although FHA loans are not for those with damaged credit, they are definitely more lenient from a credit perspective.

Rates for FHA mortgage are competitive with 1/A and conventional programs as well. In addition to the initial MIP, there is a monthly MIP payment that is made along with the mortgage payment that is calculated at 1/2 percent of the loan amount. A typical monthly payment on a $200,000 sale price, 3.00 percent down, and a mortgage loan at 6.50 percent would look like this:

Sales Price

$200,000

Down Payment

$6,000

Loan Amount

$ 194,000

MIP (1.50%)

$2,910

Final Loan

$196,910

Monthly Payment at 6.50% on a 30-year mortgage

Principal and Interest $1,244

Taxes (est.) $167

MIP (1/2% on $194,000) $80

Total $1,491

Unlike VA loans, FHA loans aren't restricted to a certain group of people (including first-time buyers), and they don't impose income limitations. The only requirements are that you can't have more than one FHA loan at a time, the property must be owner-occupied, and the loan can't be used to purchase investment real estate.

There is one unique characteristic to FHA loans. They pertain to nonoccupying coborrowers, usually called “cosigners.” FHA is the only loan program that allows for cosigners to help the buyer qualify for the loan. Technically, other loan programs allow for cosigners, but in those cases the lender requires the owner-occupying buyer to qualify on his or her own, without the cosigners income. So there's no particular advantage to having a nonoccupying coborrower on a conventional loan.

Not so with FHA loans. In fact, the occupying buyer doesn't even need to have a job at all if the cosigners can qualify for the new mortgage on top of their current debt.

This is where the expression “kiddie-condo” comes from. Parents can cosign on the loan for their kids, make a low down payment, have the kids live there, and still get the best interest rates.

For a parent or a relative to help with a conventional loan, the rate could be 1/4 to 3/g percent higher, along with a bigger down payment.

FHA loans have another unique feature when it comes to down payment funds: Conventional loans require that the buyers must have a minimum of 5 percent of their own funds in the transaction. FHA loans make allowances for down payment and even closing costs to be given to the buyer in the form of an outright gift with restrictions.

Gift funds for FHA loans can only be given by family members, employers, nonprofit organizations, religious institutions, trade unions, and domestic partners.

Although there are no income or first-time homebuyer limitations for an FHA loan, there are loan limits that will vary from county to county. FHA loan amounts are limited to 115 percent of the median home price of the area not to exceed $625,000. These strict loan limits can be exceeded only when rolling in the initial MIP. You can find out the loan limits in your area by visiting HUD's website at hud.gov.

Neither FHA nor VA loans are approved for co-op share financing, except for VA loans in New York City.

 
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