FHA loans are government-backed loans from the Federal Housing Authority. They are used to help potential homebuyers who may have trouble securing a mortgage due to low credit score or lack of sufficient down payment. We list out the basics below, but it’s always best to consult a real estate agent for specific terms.
Since the federal government assures the loan will be paid even if the borrower defaults on the loan, banks are more confident in loaning out the money. Borrowers who may otherwise be rejected for a mortgage are given the opportunity to buy a home through the FHA loan program. However, there is a trade-off. Those using FHA loans must pay for both an upfront and annual mortgage insurance premium (MIP) based on the value of the home. This insurance further protects the lender in the event that a higher-risk borrower defaults on their loan.
Now, let’s take a look at the different types of FHA loans.
A fixed-rate mortgage is given for a specific period of time at a specific interest rate that will not change over time. A borrower’s monthly payment will not change over time (with the exception of any change due to fluctuations in property taxes or insurance).
An adjustable-rate mortgage (ARM) is also set for a certain amount of time but the interest rate is adjustable over the life of the loan. Often, the interest rate is set for the first three to five years of the loan but can fluctuate after that time. This type of loan may be used by someone wanting to buy a more expensive home or someone who moves often (and would likely sell their home while their interest rate was still fixed.) Borrowers may refinance their loan after the fixed rate period has expired and their equity has increased in order to avoid the higher interest rate.
A reverse mortgage (or home equity conversion mortgage) is meant to help seniors convert their home's equity into usable cash during their retirement years but still stay in their home. Unlike most other mortgages, the borrower makes no monthly payments toward the loan until they sell the home, move out or both borrower and spouse die. In all three situations, the home then goes to the estate and the balance of the loan, plus any interest or fees is paid. If any balance remains on the loan after the home is sold, the estate (or borrower) is not responsible for the shortfall.
Graduated Payment/Growing Equity
A potential homebuyer may expect their income to increase in the near future but want to invest in a home now, in which case, they may take advantage of the FHA’s graduated payment or growing equity loans. Payments are smaller at the beginning of the loan period and increase in the years following to account for the deferred payment. They are able to purchase a home much sooner than is purchasing through traditional financing programs.
Energy-efficient FHA loans help homeowners significantly lower their utility bills through energy-efficient improvements. These costs can be incorporated into their new home rather than taking out an additional mortgage to pay for the upfront costs. This program can be applied as an add-on to another type of FHA loan or by refinancing a current mortgage loan.
The FHA allows borrowers to finance up to $35,000 in their mortgage for the purpose of repairs, improvements or upgrades. This can be to help them sell an existing home or be used to make a recently-purchased home move-in ready without having to secure a second loan for the projects.
The FHA gives loans for condos located in approved condominium projects that are primarily residential and contain at least two units.
Funding for the purchase of a mobile home are also available through FHA, although maximum loan amounts are quite lower than with other types of FHA loans and terms are shorter.
These are just a few of the options associated with FHA loans and there are specific terms related to each type and for each state. It is best to connect with an experienced Clever Partner Agent for help evaluating different financing options – and with the home-buying process in general. You may be able to get up to 1% of the price of your home rebated at closing.