FHA Loans

FHA loans are government backed loans governed by the Housing and Urban Development (HUD) department of the federal government. They are designed to assist people with little down payment, less than perfect credit, and/or lower income to buy houses. FHA loans are designed with a minimum investment requirement from the buyer of 3% of the sales price. Mortgage Insurance is charged on a monthly basis but is off set by an "Up Front Mortgage Insurance Premium" (UFMIP) which is charged and most often financed into the new mortgage loan. This allows for a smaller monthly mortgage insurance amount to be charged, lowering monthly payments and allowing them to be more affordable for buyers.

They are concerned with consumer health and safety and require stiffer property requirements than do Conventional loans. FHA loans also do not allow the buyer to pay certain closing costs that are most often paid for by the seller of the property. They do have maximum loan amounts dependent upon the county the property is in and how many units the property is. Not all properties can qualify for an FHA loan based on sales price and/or property condition. We encourage you to talk with your real estate professional about any specific property. FHA loans have three different loan options. They are outlined below.

Fixed Rate Loans

Adjustable Rate Mortgages (ARM)

2/1 Buydowns

Fixed Rate Loans

FHA Fixed Rate Loans are available in 30 and 15 year terms. Principal and Interest Payments are paid monthly. Interest is pro-rated on a monthly basis rather than a daily basis. There are no pre-payment penalties charged on any FHA loans and the interest rates are guaranteed to remain the same throughout the entire term of the loan.

Adjustable Rate Mortgages (ARMs)

FHA ARMs are available with a 1 Year fixed rate term before it starts adjusting, and then adjusts annually. The adjustment is based on the 1 Year Treasury Bill index plus the margin which is normally 2.75%. These loans have 1% adjustment cap, which means that the loan can not adjust more than 1% per annual adjustment and has a lifetime adjustment cap of 5%. This means that it can not adjust more than 5% over the life of the loan. These safeguards are more stringent than conventional loans and are intended to keep the interest rate and payment from making major adjustments.

FHA ARMs are utilized mainly for those people with good future earning potential to allow them to "grow" into a more expensive home by keeping their initial monthly payments as low as possible. Due to the nature of the loan, talk with Lance about the feasibility of this loan in your particular situation.

2/1 Buydowns

FHA 2/1 Buydowns are fixed rate loans where the lender buys down the interest rate 2% for the first year and 1% for the second year. As of the third year of the loan, the interest rate stays fixed for the remainder of the term. The loan is set for a 1% adjustment after year 1 and year 2. It is not dependent on what the interest rate market is doing. The actual dollars are pre-paid for the difference in interest payments. For instance, if you choose a 2/1 Buydown at 8%, this means that the actual loan is based on an 8% 30 Year Fixed mortgage; however, either the lender, the seller, or the buyer is paying the dollar difference between an 8% rate and a 6% rate for 12 months and the difference between an 8% rate and a 7% rate for the next 12 months. This dollar amount is paid up front at the time of closing. This presents less risk because the adjustment is guaranteed without any question as to the interest rate at the time of adjustment. Buydowns are only available on purchase transactions.

This program is utilized much for the same reason that the ARM loan is used - either because the house is not going to be kept for a long period of time, or because the buyer has good future earning potential and would like to qualify for more home now, anticipating a higher mortgage payment as their earnings increase. Discuss this option with Lance to better decide if this program would be beneficial for you.

Please note that all FHA loans allow for non-qualifying refinances. Ask Lance about this option.

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