An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (“FHA”). The purpose of FHA loans is to encourage lenders to loan money thereby stimulating the housing market.
FHA loans are very popular among first time homebuyers and those with past credit issues. FHA loans require very low down payments are forgiving of past credit indiscretions. The minimum down payment required by the FHA is 3.5%.
Since FHA borrowers are typically putting a very small amount of money down, FHA borrowers must pay mortgage insurance. There are two (2) types of mortgage insurance that must be paid by the borrower. The first is an upfront mortgage insurance premium (“MIP”) which is 1.75% of the home loan. This upfront MIP can be rolled into the mortgage or it can be paid at close of escrow as part of the closing costs. The second MIP is the annual MIP that is paid monthly. The amount of the annual MIP is around .85% of the loan amount amount. For example, an FHA borrower that has a loan amount of $300,000 would pay a monthly MIP of $212 per month ($300,000 x .85% divided by 12 months).
FHA loans are great loans for first time homebuyers or those with blemishes on their credit.