- FHA loans allow down payments or home equity as low as 3.5 percent if your credit score is at least 580. Your mortgage payment can be up to 31 percent of your gross income, or 43 percent of gross income after paying your other debts --- a higher percentage than you'll find with traditional loans. Another advantage is that you can receive your down payment as a gift, as opposed to using your own money. Plus, if you sell your home, the new buyer can assume your loan if he qualifies. And co-borrowers don't have to live in your home, so younger buyers with no credit history can cosign a loan with their parents without having to move back in with them.
- FHA-insured mortgages may cost slightly more than a traditional mortgage because of monthly mortgage insurance payments and moderately higher interest rates, although this may still be less than the fees traditional lenders may charge if your down payment is less than 20 percent or you have less-than-stellar credit. As of October 2010, the up-front premiums for FHA-secured mortgages were 1 percent of your mortgage; annual premiums, paid monthly, were 0.9 percent. Up-front premiums can be rolled into the total mortgage; annual premiums can be canceled when the mortgage has been paid down to 78 percent of the original value of your home. Annual premiums must be canceled or be paid off within five years.
- FHA's 203(k) loan program finances nonstructural repairs such as broken windows.broken window and torn screen image by Allen Penton from Fotolia.com
FHA-secured loans require the home to pass an inspection to ensure the home is livable, although the FHA's 203(k) loan program allows you to borrow up to $35,000 for nonstructural repairs, as of October 2010. There are also limits to loan amounts based on your area. Plus, with sellers setting high sales prices in the face of falling appraisal values, FHA-secured loans' low down-payment requirements make it more likely that you'll be asking to borrow more than the home's appraised value. This means you'll either have to hope the seller accepts a lower price or risk that the home is worth ponying up a larger down payment for. - FHA-approved lenders can require more income documentation and higher credit scores than FHA minimum.documents image by AGITA LEIMANE from Fotolia.com
The FHA secures loans from a pool of approved lenders that it audits; these lenders can be removed from the program if their loan default rate is higher than competitors or if their practices hurt the FHA's bottom line. As a result, many lenders have become more stringent than the FHA minimum in their income documentation and credit score requirements. - In September 2010, the FHA announced a program that allows you to "short refinance" into an FHA-secured mortgage if you're current on your non-FHA mortgage and you owe up to 125 percent of the value of your home. You must live on your property, and your lender or lenders must agree to reduce your total loan balance by at least 10 percent or more if that's what's needed to bring your balance to no more than 125 percent of the value of your home. Even if you manage to convince your lender to reduce the balance, this will negatively affect your credit score.
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