The Federal Housing Administration insures mortgages made by FHA-approved lenders. This mortgage insurance can make the difference in whether prospective homeowners will be able to afford to buy a house at all. However, FHA mortgages also come with additional home buying fees which may not apply to other types of mortgages.
Mortgage insurance premium
All FHA mortgages are insured. The upfront insurance premium is usually added to the total loan amount. The base premium is 1%, which is added to the mortgage total at closing. An additional 0.5-2.5% may be added to that premium, based on the loan-to-value ratio. This additional charge should decrease as the remaining mortgage principal falls below the threshold percentage.
Other costs added to the total loan amount
This varies from lender to lender. Typical fees and costs which are sometimes added to the total loan amount include local real estate taxes, homeowner’s insurance, and even the cost of repairing or improving a home.
Other home buying fees
Closing costs which are not specific to FHA mortgages include:
* attorney’s or escrow fees
* survey fees
* document preparation fees
* title insurance
* property taxes
* interest owing between date of closing and first monthly payment
Not all sales will include all of these costs.
The good faith estimate
All lenders must supply a good faith estimate within 3 days of making an application for a loan. This estimate will list all fees, all closing costs, and any required escrow costs. The purpose of the good faith estimate is to help you to make accurate judgements based on accurate cost assessments.
Why take an FHA mortgage?
The FHA mortgage insurance premium is usually lower than for equivalent private mortgage insurance. A parent, guardian, or other close blood relative may be allowed to co-sign the mortgage for qualifying purposes, even if that parent will not be living in the house.
In many cases, prospective homeowners do not qualify for any other type of mortgage. FHA loans only require a 3.5% down payment, as opposed to Fannie Mae or Freddie Mac, which usually require 5% down payments. Minimum qualifying credit scores for an FHA mortgage are just 620, or even 600 under some circumstances. Most private lenders require a minimum qualifying credit score of 700.
Upcoming changes
The cost of the FHA insurance premium has been inching upwards since 2009. Further increases in the premium, as well as a lower top limit on the amount of mortgage financing and an increase in the minimum down payment percentage, are likely over the next few years. As of 2012, the current top limit for an FHA mortgage is $729,750.