FHA Loans: What They Are and What’s Changing

If you are purchasing your first home or considering a refinancing of your current home mortgage, an FHA loan may be the best type of home loan for you. It offers some unique features that other home loans do not. There are, however, a few changes coming that should be noted by those who are considering this type of loan.

What is an FHA Loan?

An FHA loan is a home loan that is insured by the U.S. Federal Housing Administration. The goal of this loan is to help potential homeowners who are purchasing a home for the first time or another set of unique circumstances, such as a lower income.
FHA loans are not just for those purchasing a new home, however. They can also be used for certain repairs on your home. In fact, the cost of acquisition and the cost of repairs can all be compiled into one FHA loan.

Eligibility requirements

FHA loans are one of the easiest types of home mortgage loan for which to qualify. The FHA guidelines for loan qualifications are extremely flexible. There are a few basic FHA loan qualification guidelines that you need to keep in mind if you are considering applying for one of these types of loans.

• Two years of consistent employment
• Last two years of income should be the same or rising.
• If you’ve had a bankruptcy, it should be at least 2 years old and with excellent credit since filing
• Foreclosure should be at least 3 years old with perfect credit since filing
• Your new mortgage payment should be approximately 30% of your gross income and your total debt ratio should not exceed 45% of your gross income

How Does an FHA Loan Work?

An FHA loan guarantees a payment to the lenders if the borrower defaults on the loan. To provide the funds for this type of loan, the FHA charges the borrower a fee. Home buyers who use FHA loans pay an upfront mortgage insurance premium (MIP). In addition, the borrower also pays a regular monthly mortgage insurance fee with each payment.

Advantages of FHA Loans

• In a purchase transaction, most closing costs, prepaids & escrow fees included in the loan can be paid by the seller
• Certain borrowers who do not qualify for a conventional loan will qualify for an FHA loan
• Available for refinance of fixed and adjustable-rate mortgages
• Easier to use gifts for down payment and closing costs

Coming Changes in FHA Loans

Although FHA loans will still be an excellent option for many home buyers, the federal government is making some changes to this unique loan. Here are a few things you can expect to see that differ from previous FHA loans:

• Many lenders have increased their minimum credit score of 620, now requiring a minimum 640 credit score. FHA has lower credit score limits but lenders have implemented stricter guidelines
• Upfront Mortgage Insurance Premiums (MIPs) will decrease from 2.25% to 1%
• Monthly Mortgage Insurance Premiums (MIPs) will increase from a .55% factor to .9% factor depending on down payment and loan program

The new FHA loan rules will decrease closing costs but may increase your monthly payment. This amount may be about $30 to $50 extra a month. The decreasing upfront premiums may offset some of the increased monthly payment amounts, however.

A FHA loan is a perfect solution for many home buyers, particularly first time home buyers. They offer much more lenient rules for home loans than traditional home loans. There are a few changes that the federal government is making that should be noted. Only time will tell the impact of these rule changes. Most likely, this type of loan will still be an excellent choice for the consumer.