FHA loans and why they are right for you

FHA loans are a great resource for home buyers who may be credit challenged or may have only a small down payment saved. The FHA requires you have a credit score of 580 and above but most lenders will insist you show at least 600 as your mid score.

Why would you need one?

An FHA loan is a good place to start for home buyers who have had credit issues in the past and are starting over, or for those who have decided it’s a better idea to build their own equity rather than their landlord’s. An FHA loan may make sense in the following scenarios:

Find out if FHA loans are right for you

Not everyone has a down payment of 20% stashed away in their savings account, so FHA loans are a good way to start your quest for buying a home. These federally guaranteed loans allow you to get into your home with as little as 3.5% down. This is much less than conventional loan products will allow but they come at a cost. In order to cover the cost of guaranteeing the lender that they will be paid the balance due if you default, the FHA charges an up-front mortgage insurance premium (MIP) and a monthly mortgage insurance premium.

Fortunately for FHA shoppers, you may roll the cost of the upfront MIP into the loan but monthy MIP will be added to the payment you make every month. Lately, the FHA has lowered the cost of monthly MIP to 0.55% of the loan amount to make it more affordable for home buyers to acquire a mortgage. FHA loans can be fixed or adjustable, with adjustable loans offering the flexibility of starting off at lower rates of interest.

Are you stuck with paying MIP?

Luckily MIP can be made to go away. Originally you were stuck with MIP for the life of the loan. The FHA determined after January 1, 2001 that once your unpaid balance reaches 78% of the lower of the initial purchase price or appraised value, your MIP may be cancelled. For loans originated after June 3rd, 2013 provided you put at least 10% down initially, your MIP will be cancelled after 11 years. The cancellation only applies to loans insured under the FJA’s Mutual Mortgage Insurance fund and the MMI fund does not cover condominiums.

Another option is to refinance your loan, swapping it for a conventional loan. Once you have been paying your mortgage regularly, you will find that your credit score improves rapidly and if you have bought a home in areas where prices are appreciating, you could have built up enough equity to qualify for a conventional loan. Mortgage insurance on conventional loans are appreciably lower than for FHA loans, therefore refinancing could save you quite a bit on your monthly payments.

Past credit problems?

Many home buyers have had issues in the past that were caused by job loss, medical illness or economic upheavals. For those who have had to declare bankruptcy or have been involved in a shortsale or foreclosure, the waiting period for getting back into the marketplace can be significantly shorter for FHA loans.

You may not get the perfect mortgage at your first time of asking but the important thing is to make a start. FHA loans can offer you that start and are worth considering if your financial circumstances are