The Pulse of East Orlando Real Estate, With a Focus on Waterford Lakes

Article - Zillow.com

What is an FHA loan?

It's a bit of a misnomer, since Federal Housing Administration (FHA) loans are not loans at all. What they do is insure loans so that lenders can offer mortgage assistance to people who:

• Have fair or poor credit
• Have a low down payment (must have at least 3.5%)
• Have undergone bankruptcy
• Have been foreclosed on

Essentially, the federal government insures loans for FHA-approved lenders so that lenders reduce their risk of loss if they lend to borrowers who could default on their mortgage payments. The FHA program has been in place since the 1930s to help stimulate the housing market by making loans accessible and affordable. Traditionally, FHA loans have helped military families who return from war, the elderly, handicapped, or lower-income families, but really, anyone can get an FHA loan - they are not just for first-time home buyers.

What are the advantages of FHA loans?

What are the disadvantages of an FHA mortgage?

You knew there had to be a catch and here it is: Since an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront -or, it can be financed into the mortgage -- and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.

• Upfront mortgage insurance premium (MIP) — Appropriately named, this is an upfront monthly premium payment, which means borrowers will pay a premium of 1.00% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.00% = $3,000. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage.
• Annual MIP (charged monthly) — Called an annual premium, this is actually a monthly charge that will be figured into your mortgage payment. It is based on a borrower's loan-to-value (LTV) ratio and length of loan. There are two different Annual MIP values: 0.85% and 0.90%. If the LTV is less than or equal to 95 percent, a borrower will pay 0.50%. For LTVs above 95 percent, annual premiums will be 0.90%. Example (for LTV less than 95%): $300,000 loan x 0.90 = $2,700. Then, divide $2,700 by 12 months = $225. Your monthly premium is $225 per month. To understand when you will stop paying mortgage insurance:
  
  • For mortgages with terms more than 15 years, the MIP will drop off after five years (in most cases) or when the remaining balance on the loan is 78 percent of the value of the property — whichever is longer.
  • For mortgages with terms 15 years and less and with LTV ratios of 90% and greater, the MIP will stop when the LTV ratio reaches 78% — no matter what length of time the borrower has paid the MIP.
  • For mortgages with terms 15 years and less and with LTV ratios of 89.99% and less, you will not be charged MIP.
• Property needs to meet certain standards — Also, an FHA loan requires that a property meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).

Zillow.com