4 Reasons to Choose an FHA Mortgage

First a little background about FHA (Federal Housing Administration) mortgages. These mortgages were initiated by the US government in the 1930′s to allow the first time home buyer to purchase a home, despite some high risk factors when compared to other borrowers. FHA loans have evolved with the times and have consistently serviced the consumers that no other lending institution was willing to risk their money on. However, no matter what actually did occur with these so-called “high risk borrowers” the FHA mortgages were and are guaranteed to be paid by the US government if the consumer stops paying the mortgage. For instance, if a homeowner were to default on their FHA loan, the lender would not incur a loss because the US Government would repay the loan to the lender.

There are four great real life reasons to choose an FHA loan:

1 If your credit score is between 620-640. Todays lenders have drawn the line at anything below a 640 credit score.

2  An FHA mortgage only requires 3.5% downpayment.

3  If your down payment is a gift.

4 If one has undergone a bankruptcy or foreclosure.

One or more of these reasons could prevent a first time home buyer from getting a mortgage with a traditional lender. However, the FHA allows more than one of these situations to exist simultaneously with a borrower.

OK, there has to be a catch….is it the rate? No it isn’t the rate, that is still comparable to other 30 year conventional loans. It is in the form of the insurance. It is called the Mortgage Insurance Premium (MIP), paid in two ways:

1.  Upfront: It is equal to 1.15% of the total loan, paid at closing and frequently rolled into the total amount of the loan. For instance if you borrow $100,000, MIP would equal $1150 and you would be borrowing $101,500 (if not paid at closing).

2.  Monthly: There is also a monthly fee that lasts for 5 years no matter how much equity you have in your home. It is calculated to be 1.15% spread out into monthly payments. For instance with the $100,000 loan example above it would be $101,150 * 1.15 / 12 (annual payments) = $96.95 per month mortgage insurance. If for instance, one has over 20% equity in the home after 5 years, the MIP would end.

Would I get a FHA mortgage if I had other mortgage options? Probably not, but I would choose home ownership over the alternative hands down, if my budget permitted it. And yes, I felt this way before I became a real estate professional, before the mortgage interest rates were at an all time low and before home prices shifted downward by 30% off of the peaks of 2005-2006….!

just in case you are wondering