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60-Second Guide to FHA Mortgage Loans

[Sep 23, 2009.]


Borrowers who don't have at least a 10% down payment will probably have trouble getting a loan from most mortgage lenders. But depending upon their situation, they may be able to qualify for a Federal Housing Administration (FHA) loan. Here's a guide to how FHA loans work.

Mortgage Loans through FHA

FHA  loans now make up about 25% of all mortgage loans. That's because many home buyers have less than 10% saved up for a down payment. FHA loans allow people to put down as little as 3.5% toward the purchase of a home. Monetary gifts from a family member, employer, or charitable group can be used for the down payment.

Because of tighter lending standards, FHA loans are popular with people of all income levels. Other reasons borrowers choose FHA mortgages are:

—They don't have the best credit

—They're first-time home buyers

—They want to keep monthly payments on a mortgage as low as possible

—They're not sure a mortgage lender will give them a conventional home loan

Mortgage Interest Rates Are Competitive

Borrowers may get lower mortgage interest rates with a FHA loan. That's because the federal government insures these loans, making mortgage lenders more willing to give borrowers terms that make it easier for them to qualify.

Types of FHA Loans

Borrowers can apply for different FHA loan programs depending upon their needs. The FHA offers loans with fixed rates, which keep monthly payments on a mortgage as stable as possible over the term of the loan.  FHA also has an adjustable-rate mortgage (ARM) loan, but many home buyers are thumbing their noses at ARMs and sticking with the predictability of fixed-rate loans.

Mortgage Loans Can Include Repair Costs

FHA also offers purchase/rehabilitation loans that allow home buyers to pay for the cost of repairs on the handyman specials or fixer-uppers they buy. The amount of the 203(k) loan is based on the projected value of a property when the work has been completed. A borrower only has one mortgage loan and can make the repairs after closing on a property.

The Bottom Line

When considering FHA loans, borrowers should remember that they'll have to pay for mortgage insurance if they are making a down payment of less than 20%. Also, the FHA has gotten much stricter with appraisals. A seller may be required to take care of any necessary repairs before the closing can occur.


About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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