An FHA Loan Primer

The Federal Housing Administration (FHA) offers mortgage insurance on loans provided by approved lenders in the U.S.

This insurance provides protection to the borrower against losses resulting from the buyer defaulting. The buyer pays the costs of this mortgage insurance in the form of an FHA loan.

One of the biggest benefits of an FHA loan that it does not have the strict credit history criteria associated with conventional loans. Many times, people with credit issues or zero credit manage to get a home mortgage.

Another benefit of this option is that the down payment is considerably less compared to conventional loans, particularly in a troubled housing market where lenders may ask for a minimum of 10 percent as down payment.

Yet another benefit is that financial gifts can be availed without showing a large sum of seasoned money.

A drawback is that mortgage insurance is required up front. A borrower will make a lump sum payment up front for lowering the monthly insurance premiums. In addition, the borrower has to pay insurance until the balance on the property goes under 78 percent of its market value.

Other disadvantages include loan limit and strict criteria for the house's physical condition, carefully scrutinized by a FHA inspector.

Eligibility

FHA loans are available to new as well as previous home owners. The loan should be for buying a primary residence. The borrower may purchase multi-family housing up to four units if the buyer intends to make one of the units the primary residence.

Types of FHA Loans

FHA 203b - This is a 15- or 30-year fixed rate loan. Exceptions may be made in some cases. The interest rates may be higher compared to other FHA loans. If the borrower intends to use the home for only a short time period, taking an adjustable loan may be beneficial under the right conditions.

FHA 203k - This is a rehab loan. It enables the borrower to buy a home that needs repair and to include majority of the repair costs into the loan. The buyer can make a variety of improvements.

The buyer is required to complete the home improvement process within three months of the closing of the loan. A licensed professional should be responsible for the repairs. The funds are held in escrow instead of providing them to the buyer.

When considering this loan option, one should keep in mind that it comes with additional fees and costs. These costs can easily be in excess of $3,000.

FHA 234c - This is a loan that enables the borrower to buy a single family unit condo and get HUD mortgage insurance. In order to obtain this loan, one has to fulfill several requirements.

These requirements include: a finished condo, hazard insurance, individually owned units, common area control by the association, no restrictions on conveyance, over 90 percent of the units sold with over 51 percent occupied by the owner of the unit, and no entity with over 10 percent ownership of the project.

FHA 251 - This is an adjustable rate option, which means that there may be change in the rate of interest in future. The borrower is offered both one year mortgage and hybrid options. In comparison to other adjustable rate loans, FHA's one year adjustable rate loan begins a little higher and will probably not have a big first adjustment.

In addition, the change in interest rate cannot be over one percent per year in comparison to the two percent limit for conventional loans with a lifetime cap of five percent rather than the conventional six percent.