FHA Loans

FHA (Federal Housing Administration) is a division of the Department of Housing and Urban Development.

FHA does not lend money. FHA’s main activity is to promote home ownership by encouraging lenders to offer mortgage loans with minimal down payments. While FHA limits the maximum mortgage amount, there are no sales price or income limits.

The most popular FHA mortgages are fixed rate, 30 year loans although FHA adjustable rate loans are available.

FHA Advantages:

  • lower total down payment, as little as 3.5% of the sales price
  • lower closing cost
  • expanded qualifying ratios in comparing total monthly debts to monthly income

FHA Disadvantages:

  • Mortgage Insurance Premium (MIP) is required regardless of the down payment amount. Unlike conventional loans that require private mortgage insurance (PMI) only on down payments of less than 20%, all FHA loans require MIP, even if a 20% down payment is made.
  • FHA loans have a much lower maximum mortgage amount than conventional loans. The maximum FHA loan amount is determined within each state by county, type of construction and number of living units.

Generally speaking, if you are making a downpayment of 10% or more, a conventional loan will be more advantageous than a FHA loan. If you are making less than 10% downpayment then a careful comparison between FHA and a conventional loan is necessary to determine which loan is better for your circumstances.

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