FHA Mortgage Loans
The Federal Housing Administration has a phenomenal loan program for home buyers. FHA mortgage loans are very popular among home buyers and those who are refinancing their homes. FHA made home ownership possible to almost every working American and their families.
FHA Mortgage Loans are much more lax
The criteria to qualify for a FHA loan is much leaner than those that apply to conventional financing. Current mortgage rates for FHA mortgage loans are lower than conventional current mortgage rates. A mortgage loan borrower can qualify for a FHA mortgage loan with much lower credit scores than conventional mortgage loans. A home buyer only needs to have a 3.5% down payment plus closing costs to buy a home with a FHA mortgage loan. The home buyer can request a seller’s concession of up to 6% from the seller to assist or cover all closing costs. Part of the 3.5% down payment does not have to be all of your own funds. You can get a gift from relatives or family members for all or part of the down payment but would need a gift letter as well.
Credit Criteria less strict on FHA Mortgage Loans
FHA also has more lenient requirements for home buyers when it comes to borrower’s credit. For those borrowers who have filed bankruptcy, FHA has a two year waiting period prior for them to apply for a new home purchase mortgage loan whereas it is much longer when it comes to conventional financing. The two year waiting period needs to be two years from the date of the discharge of the bankruptcy and not the date it was filed. For those borrowers who had a foreclosure, FHA requires a minimum of a 3 year waiting period for the mortgage loan borrower to be able to apply for a home mortgage loan application.
Waiting period after foreclosure with FHA Mortgage Loans
The 3 year waiting period after a foreclosure is 3 years from the date of the sheriff’s sale or the date where the title of the foreclosed home was transferred out of your name to the bank’s name. This is a very important factor in calculating the starter date. Many homeowners who had a deed in lieu of foreclosure think that the date of them giving up ownership of the home is the date they turned their keys in to their mortgage lender. That is not always the case. Many lenders did not transfer ownership out of the borrower months, or sometimes, years after they accepted the keys. If this is the case, the foreclosed homeowner would be at a major disadvantage because the clock does not start until the deed of the house is transferred. There are folks who have turned their keys in to their mortgage lender 3 years ago but the deed is still not transferred out of their names so the start clock for the 3 year wait period did not even start. To find out when the deed was officially transferred out of your name, you can check the county recorder’s office and this can be done online.
One of the disadvantages of having a FHA mortgage loan versus a conventional loan is that with a FHA mortgage loan, a borrower needs to pay a 1.75% Upfront Mortgage Insurance Premium. On a $200,000 house, the Upfront Mortgage Insurance Premium alone is $3,500. This is a one time FHA insurance premium that goes to help fund the FHA insurance program. FHA also requires monthly insurance premiums to be charged on your FHA mortgage loan. This monthly mortgage insurance premium is calculated as 1.25% of your mortgage and dividing it by 12 months. On a $200,000 FHA mortgage loan, your monthly mortgage premium will be calculated as follows:
$200,000 (Mortgage Loan Amount ) x 0.0125 (1.25% Factor ) = $2,500 is your annual FHA mortgage insurance premium. Your monthly FHA mortgage insurance premium will be the annual FHA mortgage insurance premium and dividing it by 12 months; $2,500 divided by 12 months = $208.33
$208.33 will be your monthly insurance FHA mortgage insurance premium. You need to add this figure in to your monthly mortgage payment.
There is no monthly mortgage insurance payment on a conventional mortgage loan if you put 20% down. However, you put less than 20% down payment on a conventional loan, you are required to have private mortage insurance, also known as PMI.
Mortgage Insurance Premium on FHA Mortgage Loans
Why doesn’t everyone just go with a FHA mortgage then? The reason being is because the private mortgage insurance premium is much lower than the FHA mortgage insurance. Normally, private mortgage insurance is half the amount than that of FHA mortgage insurance. Even though a borrower might have a lower mortgage interest rate with an FHA mortgage loan, the borrower can have higher mortgage payments every month with a FHA mortgage than a conventional mortgage with a higher interest rate because of the higher FHA monthly mortgage insurance.
Conventional Mortgage Loans
With Conventional Mortgage Loans, there are no upfront mortgage insurance premium when purchasing a new home. So a new home mortgage loan borrower would not have to pay the $2,500 upfront mortgage insurance.
Guidelines on Conventional Mortgage Loans
Conventional Mortgage Loan guidelines are much stricter than FHA mortgage guidelines. The waiting period for Conventional Mortgage lending after a homeowner filed bankruptcy is normally a minimum of 4 years if not longer depending on the lender. The waiting period for Conventional Mortgage financing after a foreclosure is normally a minimum of 5 years if not longer, depending on the lender.
Both FHA financing and Conventional financing has its advantages and disadvantages. If you have any questions, please contact me via email or phone. I will be happy to see which program best benefits you.