What is an FHA Loan?
An FHA mortgage loan is a loan insured by the department of Housing and Urban Development (HUD). The insurance offered by HUD allows lenders to offer a low down payment option specifically designed to help low-moderate income borrowers achieve the dream of home ownership - the FHA loan!
In addition to the FHA loan being a great option for first time buyers, the program also offers some tremendous products that are 'outside the box'. The FHA 203(k) loan is a renovation loan that allows buyers or owners to finance repairs and renovations. The FHA 203(h) loan helps those effected by disasters get back into a home quickly with great terms.
FHA plays a very important part in the mortgage industry, offering borrowers options beyond conventional financing, and more flexible underwriting parameters to help more people get into homes and restructure outstanding loans.
How much down payment is required for an FHA loan?
The FHA loan program requires a 3.5% down payment for home purchases. For refinance loans where a borrower is just restructuring their mortgage (a rate/term refinance), 3.5% equity is needed in the property. For a cash out refinance, FHA allows a borrower to obtain up to 85% of their home value in cash proceeds.
One important thing to know is that FHA loans may be coupled with HUD-approved down payment assistance (DPA) loans that may help finance the down payment and in some cases, closing costs as well. In these instances, borrowers may be able to obtain the dream of home ownership with very little money out of pocket using the FHA mortgage product.
Why do FHA loans have PMI?
FHA mortgage loans always come with mortgage insurance (PMI). Mortgage insurance insures a lender, or in this case HUD, against losses that could result if a borrower fails to make payments on their mortgage.
While PMI may seem like a negative thing, it's a necessary evil - without it, lenders wouldn't be willing to shoulder the risk associated with many low down payment mortgages. With insurance backing any potential losses, they're willing to lend mortgage loans to borrowers with a low (and sometimes no) down payment.
Does FHA allow Down Payment Assistance (DAP)??
FHA allows borrowers access to many down payment assistance (DAP) options that can allow borrowers to finance their down payment and/or closing costs, effectively buying a home with no- or little of- their own money.
DAP programs must be HUD approved, and can cover the 3.5% down payment requirement, along with closing costs associated with a home purchase.
With FHA loans, like conventional loans, borrowers may also get help with down payment funds in the form of a gift from family