The FHA Loan is an awesome option for both the first time home buyer and the buyer that is looking to upgrade or relocate to a different property. This loan is for primary residence purpose only. The FHA loan has some Great benefits and some not so good benefits. I will list the pro’s and con’s below.
FHA Loan Pros
- The FHA Loan is assumable. This means that at any point in time someone can assume on or off the loan as long as they qualify.
- We often use this benefit when a borrower does not have enough income to qualify. He or she can have a family member co-sign for them. Later when the primary borrower has more income the co-signer can come off the loan without having to refinance the loan.
- The FHA Loan only requires 3.5% down payment. The down payment can also be gifted from a family member.
- FHA Loans have lower interest rates then conventional loans. Depending on the day the FHA loan is normally .25% lower than conventional financing
- FHA Loans can be STREAM LINE refinanced. This means that the borrower in order to take advantage of the lower rates the borrower does not have to order a new appraisal. This helps in declining markets. Conventional home owners more then likely will have to have an appraisal with sufficient equity in order to qualify for the lower rate.
- The FHA Loan is the only loan option that will allow for Down Payment Assistance Programs.
FHA Loan Cons
- All FHA Loans have whats called Monthly Mortgage Insurance. Borrowers will have to pay monthly payment as well as an up front financed amount.
- If a borrower wanted to do a 15 year loan and put 10% down the borrower would avoid having to pay for the monthly mortgage insurance. They would still have the upfront mortgage insurance premium.
- Effective June 1st, 2013 the Monthly Mortgage Insurance will be for the life of the loan.
The MIP is a requirement from the government. There are two parts to the Mortgage Insurance.
Monthly Mortgage Insurance
This is a monthly charge and is calculated by multiplying the loan amount by 1.3% and dividing by 12/months. Example: 200,000 x .9% = $2,600 / 12 months = $216/month
Mortgage Insurance Premium
This is a one time charge that gets financed on top of the loan amount and is calculated by multiplying 1.75% to the loan amount. Example: $200,000 x 1.75% = $3,500 so the total loan amount after the MIP is financed is $203,500.