HOW AN FHA LOAN WORKS

The FHA does not loan the money to a buyer, it simply insures that the total mortgage will be paid to the lender in the event that the buyer defaults. It is always up to the private lender (bank, credit union, savings and loan) to decide whether or not they will lend the money.

FHA will analyze a borrower's credit history in determining the FHA loan for approval. A borrower who has made timely payments serves as a guide and demonstrates their willingness to repay future credit obligations. The FHA guidelines state that a minimum of two years must elapse since the discharge date. A borrower whose previous residence or other real property was foreclosed on or given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for an FHA insured mortgage.

FHA loans typically do not require the homebuyer to pay more than 3-5% of the total mortgage amount as down payment. Unlike traditional loans, this money may also be a gift to the homebuyer, and does not need to be secured as the homebuyer's own money. Often, there are "points" associated with the FHA loan that are usually worth about 1% of the total mortgage value. These points are paid to lenders in order to help lower the interest rate of the mortgage.

FHA Mortgages may require mortgage insurance. The Mortgage Insurance charged is .5% per year of the loan amount and is charged to the homeowner each month. In addition, FHA charges an upfront mortgage insurance premium of 1.5%

Closing costs on FHA (or conventional loans) usually run between 2-3% of the total loan amount and are the responsibility of the buyer. Typical closing costs include but are not limited to: appraisal report, credit report, Lender fees, Title insurance/Escrow, attorney fees, recording fees, taxes and homeowners insurance.

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