ANSWERS TO COMMON FHA QUESTIONS

Q: What is an FHA loan?

A: An FHA loan is considered insurance more than it is considered a loan. The FHA does not lend you money; private lending organizations, such as banks, credit unions, or savings and loans, do. A loan secured with FHA approval simply means that your mortgage is insured to the lender in the case of default by the homebuyer.

Q: What are the advantages of an FHA loan?

A: The advantages of an FHA loan can be many. Typically, only a 3% down payment is required to secure an FHA loan. Unlike more traditional loans, the money for down payment does not have to be verified as the buyer's money, but can be a gift to the home purchaser from outside sources. In addition, the credit qualifications for an FHA loan are often less stringent than with conventional loans. Bankruptcy or foreclosure does not necessarily disqualify a borrower from approval, if the processes have been completed within the required time period.

Q: Are FHA loan processes complicated?

A: No more so than conventional loan processes. Thanks to FHA revamping, the financing procedures were extremely slimmed down within the past 20 years. In some cases, it is easier to qualify for an FHA loan than it is for a conventional loan.

Q: Who is eligible for an FHA loan?

A: Anyone who meets the credit, income, and employment requirements. U.S. Citizenship is not required for an FHA loan. However, the property secured with the loan must be the purchaser's primary residence. In addition, a social security card is necessary in order to qualify for an FHA loan.

Q: What is mortgage insurance, and how does it apply to FHA loans?

A: Mortgage insurance is required in order to secure an FHA loan. This insurance money is collected by the lender (the bank, credit union, or savings and loan) and paid to the FHA. If a buyer defaults on their loan, this money is then returned to the lender in the form of insurance against the default. Mortgage insurance costs are typically 1% of the loan total. Until 20% of the equity in the home is paid off, private mortgage insurance may be required, as well.

Q: What are the different types of FHA loans?

A: There are several different types of FHA Loans and they generally reflect those of conventional loans. There is a fixed rate mortgage loan, which secures an interest rate at the time of purchase and carries it through for the life of the loan. There is also an adjustable rate mortgage (ARM). The interest rate on the ARM fluctuates throughout the life of the loan, mirroring that of the current national index. There is also a graduated payment mortgage (GPM), which requires a down payment and has negative amortization.

Q: What are the interest rates on FHA loans?

A: FHA loan interest rates tend to be no lower or higher than the national average for conventional loans. The interest rates for FHA loans reflect the current market conditions. A buyer may also use points when securing an FHA loan. "Points" lower the interest rate, and must be paid either as down payment or financed through the loan.

Q: What are my expenses when taking out an FHA loan?

A: The expenses a buyer is responsible for when purchasing a house with an FHA loan are the following: Down payment (usually no more than 3%), appraisal fee, escrow, loan origination fee (typically 1% of base loan amount), recording fees, credit report charges, title insurance policy fees, MMI impounds, hazard insurance and reserves, MIP (mortgage insurance premium, which can be financed), and property taxes.