The Federal Housing Administration (FHA), which is a part of HUD, insures this loan so the lender can offer a more competitive deal. This type of loan is popular among first-time homebuyers. However, being a first-time buyer is not a requirement. FHA loans are normally restricted to a primary residence and only one FHA loan per person, unless the borrower or borrowers can prove that their family has outgrown the current residence or if an employment relocation is taking place. Either way, these circumstances are up to the lender and underwriter’s discretion.

Advantages

FHA’s minimum requirement for down payment is 3.5% or $3,500 on a sale price of $100,000. Technically, FHA does not require a minimum credit score; however, lenders have what are called “lender overlays”, which usually require a credit score of at least 640. Other conditions can apply to credit scores down to 500. FHA programs come in a large assortment (e.g., 30-year, 30-Year 2/1 Buydown, 15-Year, 3/1 and 5/1 ARMs).

The advantage of doing an FHA 15-Year loan with 10% down payment or equity is that the consumer will not have to pay monthly mortgage insurance. All Conventional loans require a 20% down payment to eliminate mortgage insurance.

Disadvantages

On a 30-Year fixed loan with 3.5% down payment, FHA requires that you pay a monthly mortgage insurance fee of 1.15%. With a loan amount of $100,000, that is $95.83 per month. Worth mentioning is that the mortgage insurance fee factor will decrease to 1.1% with a 5% plus down payment. Loan amounts are restricted to county loan limits (e.g., Maricopa and Pinal County limits for a single-family residence are currently $346,250).

Per FHA guidelines and in addition to the monthly mortgage insurance, the borrower or borrowers will pay an upfront mortgage insurance fee of 1%. This fee can be financed, but this means that interest on that fee is paid over the term of the loan. For example, if the base loan amount is $100,000, the fee will be $1,000, resulting in a full loan amount of $101,000.

With Conventional loan programs, the borrower or borrowers can appeal to have the mortgage insurance removed once the property’s loan-to-value ratio reaches 80%. With FHA mortgages, the appeal cannot be made until the loan is a minimum of 5 years old.