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The Federal Housing Administration (FHA) has insured millions of mortgages since the 1930's. Historically, FHA mortgages have allowed millions of homeowners to obtain financing for a mortgage that they otherwise could not afford under a conventional loan or because they do not meet the qualifications of a VA or USDA loan. However, after the 2007 mortgage financial crisis, the FHA has been trying to make it more difficult for borrowers to obtain this mortgage by changing several of their guidelines. Nevertheless, this type of loan is still a great option to purchase or refinance a house.

What is an FHA mortgage? 

In simple terms, an FHA mortgage is a type of insured loan provided by the Federal Housing Administration. FHA loans are able to financing for borrowers who may find difficult to qualify under the tighter guidelines of a conventional mortgage loan. 

What are the advantages of an FHA mortgage? 

  • Great program for a first time homebuyer. 
  • Insured by the government. 
  • Provides financing for cash out refinancing toward home improvement and energy efficient savings. 
  • Down payment and closing costs assistance for first time homebuyers. 
  • Job history qualifications are less strict than on conventional loans. The FHA has several guidelines that allow borrowers to acquire an FHA loan with only one year of verifiable income or if they have been laid off due to the financial crisis.
  • The FHA takes into consideration "extenuating circumstances" when there is a bridge in job history or significant loss of income. 
  • Easy credit qualifying. The FHA does not have a set "minimum" credit score to qualify a borrower so the decision is up to a particular lender to have their own overlay guidelines. 
  • Derogatory credit such as foreclosures, deed in lieu, short sales and bankruptcies need less seasoning time after discharging than on other types of loans.   
  • Very little downpayment necessary. Generally, an FHA mortgage requires only 3.5% of the loan amount as a downpayment. However, there are different FHA programs where a buyer may secure a distressed HUD-owned property for as little as $100 down. 
  • Excellent interest rates. Generally lower than on conventional loans. 

What are the disadvantages of an FHA mortgage? 

  • All FHA mortgages are required to have a Mortgage Insurance Premium (MIP). This premium can get costly, as it is 1.75% of the loan amount upfront which can be financed on the loan. However, there is a also a monthly charge on MIP which depends on the loan term and equity of the home. For more information on FHA monthly premiums, visit us here. 
  • MIP is in effect for the life of the loan unlike on a conventional mortgage where PMI drops off at 78% LTV. 
  • Higher closing costs due to the funding of the mortgage insurance premium.
  • Borrowers with high FICO scores may not get a better interest rate.  
  • Financing a condominium through an FHA loan may be tough or impossible as the building must be originally FHA approved. 
  • Primary home financing only. No second homes or investment properties allowed. 

If you have further questions in acquiring an FHA loan, please visit me here. 


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