Why Choose an FHA Home Loan over Conventional Home Loan?

So why would you the borrower choose and FHA loan over a Conventional Home Loan? One of the biggest reasons that borrowers choose a FHA Home Loan is that it is easier to qualify for an FHA Loan. Why? Because with an FHA Home Loan a borrower can qualify by putting down 3.5% with less than perfect credit. So people who have gone through a bankruptcy, foreclosure or other financial hardship can qualify as long as they satisfy other requirements such as income etc. Conventional Home Loans on the other hand usually require at least 20% down and have stricter qualifying criteria.

Qualification Requirements for an FHA Home Loan:

  • Borrower(s) must have steady employment history for at least two years
  • Borrower(s) must have a valid Social Security Number, lawful residency in the US and be of legal age to sign a mortgage
  • Borrower(s) must make a minimum down payment of at least 3.5%, which can be gifted by a family member
  • Property must be a primary resident of borrower(s)
  • Property will need to be appraised
  • Minimum credit score of 580 with 3.5% down payment or 500-579 with 10% down payment
  • Must be out of bankruptcy for at least two years with re-established good credit
  • Must be out of foreclosure for at least three years with re-established good credit
  • There are maximum mortgage limits for FHA loans that vary by state and county.

The main disadvantage of an FHA Home Loan would be the Mortgage Insurance Premium (MIP) that is required to be paid with FHA Home Loans. MIP is a policy that protects lenders against losses that result from defaults on home mortgages. FHA requirements include mortgage insurance primarily for borrowers making a down payment of less than 20%.

Current rates (as of 4/1/2013):

On or after 4/1/2013 on terms > 15 years and loan amounts < =$625,500 - If the loan to value is < = 95%, the new Annual Premium is 130 basis points (bps). If the loan to value is > 95%, the new Annual Premium is 135 basis points (bps).

On or after 4/1/2013 on terms < = 15 years and loan amounts < =$625,500 - If the loan to value is < = 90%, the new Annual Premium is 45 basis points (bps). If the loan to value is > 90%, the new Annual Premium is 70 basis points (bps).

FHA is also exercising its authority to add an additional 5 basis points to mortgages with base loan amounts exceeding $625,000.

On or after 4/1/2013 on terms > 15 years and loan amounts > $625,500 - If the loan to value is < = 95%, the new Annual Premium is 150 basis points (bps). If the loan to value is > 95%, the new Annual Premium is 155 basis points (bps).

On or after 4/1/2013 on terms < = 15 years and loan amounts > $625,500 - If the loan to value is 78.01% - 90.00%, the new Annual Premium is 70 basis points (bps). If the loan to value is > 90%, the new Annual Premium is 95 basis points (bps).

Current Up-Front Mortgage Insurance Premium:

The UPMIP is currently at 1.75% of the base loan amount. This applies regardless of the amortization term or LTV ratio.

Current Up-Front MIP on certain Streamline FHA Refinances:

SF forward streamline refinance transactions that are refinancing FHA loans endorsed on or before May 31, 2009, the UFMIP is currently 0.01 percent of the base loan amount.

Current to Annual MIP on certain Streamline FHA Refinances:

 SF forward Streamline Refinance transactions that are refinancing FHA loans endorsed on or before May 31, 2009, the Annual MIP will be 55 bps, regardless of the base loan amount and takes effect on or after June 11th, 2012.

Term > 15 Years (effective 4/1/2013)

Base Loan Amount

LTV

Previous MIP

New Annual MIP

< = $625,500

< =95%

120 bps

130 bps

< = $625,500

> 95%

125 bps

135 bps

Above $625,500

< =95%

145 bps

150 bps

Above $625,500

> 95%

150 bps

155 bps


Term < = 15 Years With LTV Above 78% (effective 4/1/2013)

Base Loan Amount

LTV

Previous MIP

Annual MIP

< = $625,500

< =90%

35 bps

45 bps

< = $625,500

> 90%

60 bps

70 bps

Above $625,500

< =90%

60 bps

70 bps

Above $625,500

> 90%

85 bps

95 bps


Duration of MIP:

For all mortgages regardless of their amortization terms, any mortgage involving an original principal obligation (excluding financed Up-Front MIP (UFMIP)) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first.

For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first.

The table below shows the previous and the new duration of annual MIP by amortization term and LTV ratio at origination.

Term

LTV (%)

Previous

New

< = 15 Years

< = 78%

No Annual MIP

11 years

< = 15 Years

> 78 – 90%

Cancelled at 78% LTV

11 years

< = 15 Years

> 90%

Cancelled at 78% LTV

Loan Term

> 15 Years

< = 78%

5 years

11 years

> 15 Years

> 78 – 90%

Cancelled at 78% LTV & 5 years

11 years

> 15 Years

> 90%

Cancelled at 78% LTV & 5 years

Loan Term


For more information, contact out knowledgeable brokers at Loan People USA.

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