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    • What is an FHA loan?

      An FHA loan is a government-backed mortgage insured by the Federal Housing Administration, or FHA for short. Popular with first-time homebuyers, FHA home loans require lower minimum credit scores and down payments than many conventional loans. Although the government insures the loans, they are offered by FHA-approved mortgage lenders.

      FHA loans come in fixed-rate terms of 15 and 30 years.

    • How FHA loans work

      FHA’s flexible underwriting standards allow borrowers who may not have pristine credit or high incomes and cash savings the opportunity to become homeowners. But there’s a catch: borrowers must pay FHA mortgage insurance. This coverage protects the lender from a loss if you default on the loan.

    • How to qualify for an FHA loan

      To be eligible for an FHA loan, borrowers must meet the following lending guidelines:

      • FICO score of 500 to 579 with 10 percent down or a FICO score of 580 or higher with 3.5 percent down.
      • Verifiable employment history for the last two years.
      • Income is verifiable through pay stubs, federal tax returns and bank statements.
      • Loan is used for a primary residence.
      • Property is appraised by an FHA-approved appraiser and meets HUD property guidelines.
      • Your front-end debt ratio (monthly mortgage payments) should not exceed 31 percent of your gross monthly income. Lenders may allow a ratio up to 40 percent in some cases.
      • Your back-end debt ratio (mortgage, plus all monthly debt payments) should not exceed 43 percent of your gross monthly income. Lenders may allow a ratio up to 50 percent in some cases.
      • If you experienced a bankruptcy, you must wait 12 months to two years to apply, and three years for a foreclosure. Lenders may make exceptions on waiting periods for borrowers with extenuating circumstances.
    • FHA vs. conventional loans

      Unlike FHA loans, conventional loans are not insured by the government. Qualifying for a conventional mortgage requires a higher credit score, solid income and a down payment of at least 3 percent for certain loan programs. Here’s a side-by-side comparison of the two types of loans.

       

       CONVENTIONAL LOANFHA LOAN
      Credit score minimum 620 500
      Down payment Between 3% to 20% 3.5% for credit scores of 580+; 10% for credit scores of 500-579
      Loan terms 10, 15, 20, 30 years 15 or 30 years
      Mortgage insurance premiums PMI: 0.5% to 1% of the loan amount per year Upfront premium: 1.75% of the loan amount; annual premium: 0.45% to 1.05%
      Interest type Variable rate, fixed rate Fixed rate
    • Types of FHA loans

      In addition to its popular FHA loan, the FHA also insures other loan programs offered by private lenders. Here’s a look at each of them.

      FHA 203(k) loans — These FHA loans help homebuyers purchase a home — and renovate it — all with a single mortgage. Homeowners can also use the program to refinance their existing mortgage and add the cost of remodeling projects into the new loan. FHA 203(k) loans come in two types:

      • The limited 203(k) has an easier application process, and the repairs or improvements must total $35,000 or less.
      • The standard 203(k) requires additional paperwork and applies to improvements costing more than $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area.

      Home Equity Conversion Mortgage, or HECM — A HECM is the most popular type of reverse mortgage and is also insured by the FHA. A HECM allows older homeowners (aged 62 and up) with significant equity or those who own their homes outright to withdraw a portion of their home’s equity. The amount that will be available for withdrawal varies by borrower and depends on the age of the youngest borrower or eligible non-borrowing spouse, current interest rates and the lesser of the home’s appraised value or the HECM FHA mortgage limit or sales price.

      FHA Energy Efficient Mortgage (EEM) program — Energy efficient mortgages backed by the FHA allow homebuyers to purchase homes that are already energy efficient, such as EnergyStar-certified buildings. Or they can be used to buy and remodel older homes with energy-efficient, or “green,” updates and roll the costs of the upgrades into the loan without a larger down payment.

      FHA Section 245(a) loan  — Also known as the Graduated Payment Mortgage, this program is geared at borrowers whose incomes will increase over time. You start out with smaller monthly payments that gradually go up. Five specific plans are available: three plans that allow five years of increasing payments at 2.5 percent, 5 percent and 7.5 percent annually. Two other plans set payment increases over 10 years at 2 percent and 3 percent annually.

       

      source: Bankrate.com