A “Crash Course” in the Federal Housing Administration and its Financial Programs
The Federal Housing Administration (FHA) was established back in 1934 with a simple goal: to help more Americans purchase new homes. As with any governmental agency, the mortgage loan options available through the FHA as well as the rules for applying can be quite complicated, and the FHA’s programs can also be challenging to comprehend.
Thus, the goal of this article is to give you a “crash course” in FHA mortgage programs, and more specifically, the details surrounding FHA mortgages.
First, let’s answer the most common questions about FHA mortgage loans:
- What credit score do I need to apply? Although each state is a little different, a good rule of thumb is that most institutions will be looking for a credit score of 620 or better.
- What is the maximum amount I can apply for? Right now, until you present your mortgage broker with the necessary documents to analyze your situation, the answer is: “It depends.” Only after an analysis of your current financial status can a maximum amount be determined.
- How do I know if the house I’m looking to buy qualifies me to apply for an FHA mortgage? Easy! To check if your property is eligible, simply search for FHA eligible properties in your zip code.
FHA Mortgage Loan Types
Your mortgage broker will be familiar with the types of loans available, but you will also want to learn your options before you begin.
First, you must be aware that FHA mortgage loans have both an up-front mortgage insurance premium and an annual mortgage insurance premium. The insurance costs and annual percentages will vary based on the length of the loan and the amount of your down payment. Thus, you want to make sure to ask your mortgage advisor about these costs so you do not end up being surprised by them.
Second, it is also important that you understand “why” these costs are required. Very simply, FHA mortgage programs provide an option for those who may not be able to qualify for a conventional loan. However, this means that financial institutions are taking a little more risk, so the insurance premiums are designed to act as a form of protection for banks and lenders.
When discussing the available FHA mortgage programs with your advisor, you should determine which of the four Single Family Housing programs will be right for you:
1. Section 203(b)
- Most FHA mortgage loans fall under this section.
- This type of loan can be used to finance one to four housing units.
- Mortgage terms can be adjusted to accommodate the needs of the applicant.
- Low down payment—only 3.5% is required.
- There are also various gift options for down payments that are acceptable.
2. Section 234(c)
- This type of loan is used for condominiums.
- The same credit requirements for a Section 203(b) loan apply to this as well.
- New 2010 rules require that this type of application be submitted via HRAP/DELRAP. Your mortgage advisor will be aware of this, but you can look for Arizona-approved condos by clicking on this link here.
3. Section 203(k)
- This program allows a borrower to finance the costs to repair or remodel their home.
- One mortgage loan will be used for the acquisition and upgrade of units.
- Up to four housing units are eligible, but consult your preferred bank on other criteria.
- FHA mortgage consultants may be required to qualify for certain 203(k) loans.
4. HECM – Reverse Mortgages
- This type provides applicants with access to the equity in their housing units.
- Several payment methods are available, including lump sums, installments, lines of credit, or a combination of these.
In addition to this list, the FHA has developed new options such as the Streamlined Refinance Program and the Make Home Affordable Program that are meant to help homeowners alter and refinance their current mortgages. Again, your mortgage advisor can give you all of the details, but hopefully, this crash course has now prepared you to ask the right questions!