FHA Mortgage FAQ

Posted December 03 2014
by PenFed Team
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Federal Housing Administration loans  were once an easy in for homebuyers without the ability to make a large down payment, but as prices have gone up on FHA mortgages they’ve lost some of their appeal. Though FHA loans are easier to qualify for than conventional mortgages, they come with a high price tag, including the need to pay mortgage insurance for the life of the loan, a fee that definitely adds up.

Still, while an FHA mortgage might not be your first option, it can be a way to get into a home if you don’t have enough saved for a down payment or your credit history isn’t as good as it could be. When you’re weighing your mortgage options, you should take a look at FHA mortgages to decide if they may be a good fit for your financial situation. Read on to see some of the most common questions about FHA mortgages in our FAQ.

What Is an FHA Loan?

The FHA insures loans made by FHA-approved lenders, which means they may lend money to individuals who pose a higher credit risk and might not be able to get a conventional mortgage. Because the loans are insured by the FHA, they typically require a lower than usual down payment (as little as 3.5%) with less stringent credit requirements.

What Does an FHA Loan Cost?

In addition to a down payment and closing costs, FHA loans require borrowers to pay an up-front fee for mortgage insurance (UFMIP or Up-Front Mortgage Insurance Premium) as well as pay an annual fee for mortgage insurance. Expect to pay at least 3.5% of the purchase price as a downpayment and an additional 1.75% towards your UFMIP, while the annual fee varies depending on the length of the loan, the amount borrowed, and the loan-to-value ratio.

When you’re looking at these costs, be sure to do the math: other types of loans, even those that require mortgage insurance, may cost you less than paying the combination of UFMIP and mortgage insurance as required by the FHA. You’ll want to investigate different loan types and different lenders to see which type of mortgage makes the most sense for your financial situation.

What Is Mortgage Insurance?

Mortgage insurance or private mortgage insurance (PMI) is an additional cost added to your mortgage payments on a monthly or yearly basis to cover the lender in the event you default. If you can’t repay your loan, mortgage insurance makes sure your lender gets paid — which means the lender is more likely to make a loan that could be high risk.

While mortgage insurance is typically only required for loans with a down payment under 20%, they’re required for the lifetime of all FHA loans.

Who Can Qualify for an FHA Loan?

The biggest advantage of FHA loans is that they’re easy to qualify for, even if you don’t have the cash for a big down payment or your debt-to-income ratio (DTI) is higher than your lender might like. Though you’ll still want a decent credit history to get an FHA loan, a perfect credit report is not required.

Why Would I Want an FHA Loan?

Though the fees on FHA loans aren’t particularly favorable for borrowers, if you’re having trouble qualifying for a conventional mortgage, you may be able to qualify for an FHA loan. For individuals with less than sparkling credit or a high DTI, FHA loans may be the best way to get into a home — but you should definitely shop around to consider other mortgage options, including VA mortgages, before deciding on an FHA loan.

How Do I Get an FHA Loan?

The process to get an FHA loan is very much like the process to get a conventional mortgage — just look for an FHA-approved lender and be sure to tell them you’re interested in an FHA loan. Though these loans are backed by the FHA, the rates and requirements will vary from lender to lender, so be sure to shop around to get the best terms.

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