Through FHA loans, the Federal Housing Administration (FHA) allows people with a lower income to take out a loan for the purchase of a home. FHA loans are not actual loans, but a type of insurance. If you get approved for an FHA loan, the Federal Housing Administration will insure this loan against default. Being designed for people with low to moderate income, FHA loans allow someone to borrow up to 96.5 percent of the cost of the home.
As opposed to conventional mortgage rates, FHA rates are endorsed by a mortgage bond issuer group called Ginnie Mae, the only group of its kind that is fully backed by the US government. This makes Ginnie Mae bonds risk free, and the Federal Housing Administration mortgage rates reflect this.
Advantages of an FHA Loan
With lower mortgages rates than conventional mortgage programs, Federal Housing Administration loans are an attractive alternative. Here are some advantages to taking out an FHA loan:
- Easy to qualify with a less than perfect credit score. Conventional loans made through Freddie Mac and Fannie Mae punish applicants with a credit score lower than 740, but you can still qualify for an FHA loan if you have a low credit score.
- Smaller down payment. Being as low as 3.5 percent, down payments for FHA loans are generally lower than down payments for conventional loans, which can be as high as 20 percent.
- The down payment and closing can be paid with borrowed money or gifts.
- No prepayment penalty. While many conventional loans require you to pay a prepayment penalty, with FHA loans you’re able to pay off your mortgage before the full term of the loan.
FHA Mortgage Rates and Insurance Premiums
FHA mortgage rates have decreased a lot lately, but the cost of the mortgage remains mostly unchanged due to high mortgage insurance premiums (MIP). Because FHA provides insurance for loans, it faces the same risks as home insurance company, for example. If the amount of premiums it collects isn’t higher than the amount of claims paid, the FHA could face bankruptcy. The FHA differs from other insurers because it is required to maintain $2 for every $100 insured in its reserves, but, in November 2011, it was discovered that the FHA only held $0.24 for every $100 insured, which made insurance premiums increase 4 times during the last 4 years.
While the FHA used to charge an annual mortgage insurance premium of only 0.50 percent back in 2008, the annual MIP is up to 1.25 percent in some cases, and even 1.50 percent in some high cost areas. This means that, for example, if you have a mortgage rate of 4 percent, your annual mortgage rates will be as high as 5.25 percent, with the current mortgage insurance premiums.
The good news is that the FHA insurance is not permanent. On a 30-year fixed rate FHA mortgage, the insurance has to be paid for at least 5 years before the MIP can be removed, regardless of what your loan balance or loan to value ratio is. On a 15-year fixed-rate FHA mortgage, the MIP is removed as soon as your loan to value ratio is low enough.
Another good news is that, if your mortgage pre-dates June 1, 2009, you could get a reduced MIP through the FHA Streamline Refinance program. In order to qualify for the FHA Streamline Refinance you must have made at least 6 mortgage payments in the last 12 months, and not have missed any payments in the last 12 months. Through this program, you will only pay a 0.55 percent annual mortgage insurance premium.
Even with fairly high mortgage insurance premiums, FHA loans are still an attractive alternative to conventional loans for people with a lower credit score, and who want to take advantage of the low FHA mortgage rates and various other advantages.