FHA Loans: Government-Insured from Start to Finish

FHA home loans benefit borrowers in various ways. For one, interest rates on FHA loans tend to be lower than rates on conventional mortgages since FHA loans are insured by the government. Also, the down payment required on an FHA loan is usually much lower than that of a conventional mortgage (currently as low as 3.5% of the purchase price compared with anywhere from 5-30% for a conventional loan). In addition, it has customarily been much easier for borrowers to qualify for FHA loans than for conventional loans, due to less rigid underwriting guidelines.

The FHA is able to insure home loans due to receipt of Mortgage Insurance Premiums (MIP). Lenders collect MIP from borrowers at time of closing and send it to the FHA. If the borrower defaults, FHA will use the MIP collected to help cover costs associated with paying off the loan. The amount of MIP due at closing is equal to 1.75% of the loan (so for a $100,000 loan, upfront MIP would be $1,750). Upfront MIP is typically included in the loan amount, in which case the borrower doesn’t have to pay it out of pocket. The benefits reaped from having an FHA loan far exceed the cost of MIP.

A fixed rate mortgage is one in which the interest rate remains the same throughout the life of the loan. With an ARM, the interest rate typically starts out low but progressively increases. The long-term financial advantage of a fixed rate mortgage is almost always greater than an ARM.

Unlike some home loan programs, there is never a pre-payment penalty on an FHA loan. Borrowers can payoff their FHA loan at any time without incurring pre-payment fees.