What is the FHA loan?
An FHA loan is a mortgage loan issued by the federally qualified lender and the Federal Housing Administration (FHA) assures this FHA loan. It is specially designed for low-to-moderate income borrowers to help them to purchase a home with the low downpayment.
The loan can be borrowed up to 96.5% of the price of the property or home with a credit score of at least 580 or 10% downpayment should be made. The basic of 3.5% downpayment requirement can be gifted or a granted that make the FHA mortgage loans famous for first-time homebuyers.
FHA loan requirement:
- Steady employment history.
- Valid social security number.
- The Minimum downpayment is 3.5%.
- New FHA mortgage loans are only accessible for primary residence occupancy.
- The Property should be appraised from an FHA-Approved appraiser.
- The front-end ratio should be less than 31% of the borrower gross income.
- The back-end ratio should not be less than 43% of the borrower gross income.
- The minimum credit score should be 580 to get the maximum finance with a minimum down payment of 3.5%.
Advantages of FHA loan:
- Less credit requirement: To get the approval FHA loan the credit score required is 580 only.
- Smaller downpayment: To get the conventional mortgage loan the required downpayment will be 5-10%. For FHA loan the down payment is 3.5% only.
- Friendlier debt ratios: The debt payment to the lender is limited to 36% of the income in conventional mortgage loans. Whereas the for FHA loan it is extended up to 41% of the borrower’s income.
- Better interest rates: If the credit score is high the borrower can get high value while interest shopping. Since in FHA loan the credit score is low the borrower can save a lot of money on interest payment.
Disadvantages of FHA loan:
- Lack of rewards for good credits: The borrower may be missing out on the lower interest rate if the borrower have good credits. Over the term period of the loan, the cost may increase.
- More mortgage insurance paid: Because of lower downpayment the borrower has to pay more on private mortgage insurance to make up the difference.
- Inspection standards: To get FHA loan eligibility the property must go through a standard inspection. It limits the borrower choices of available home and sometimes it will become difficult to get the FHA loan.
- Few loan choices: The borrower will get less choice in the FHA loan when compared to the conventional loan.
- Low loan ceiling: As the price is different from place to place. The borrower cannot buy the property of their choices in some places as the prices are high and fall outside the allowable amount.
- Limited condo supply: if the condominium suits the borrower housing needs then the borrower should be aware that the list of available FHA approved units could be pretty short.
In FHA loan there is no prepayment penalty. So the borrower can payoff the additional payments of the FHA loan. And it is only recommended if the borrower financial situation is helpful.
The components included in the FHA loan calculator:
- Home price: Cost of the home the borrower purchased.
- Downpayment: The downpayment the borrower made while purchasing.
- Loan term: The time period for the loan is borrowed.
- Up front FHA MIP: The amount paid for PMI. The current PMI is 1.75%.
- Annual FHA MIP: The amount paid for PMI annually. The current PMI is 0.85%.
- Annual FHA MIP duration: The time period for PMI.
- Property tax: The tax paid on the property.
- Home insurance: The insurance paid for the home yearly.
- HOA fee: The fee paid for HOA yearly.
- Other costs: The other costs included in the loan or for repair and etc.
- Start Date: When the borrower started to pay the FHA loan.
- Annual tax and cost increase:
- Property tax increase.
- Home insurance increase.
- HOA fee increase.
- Other costs increase.
- Extra payments:
- Monthly pay.
- Yearly pay.
- One-time pay.
In this FHA loan calculator, you can easily calculate the total payments made in FHA loan and you the check balance amount to be paid.