FHA Loans

An FHA Loan is a loan that’s insured (not necessarily owned) by the federal government. This means that the FHA (Federal Housing Administration) agrees to pay the lender if the borrower defaults on the loan.

FHA loans are by far the most popular loans due to their low down payment requirements and attractive interest rates. The minimum down payment for an FHA insured loan is 3.5%, and it can be in the form of a gift from a friend or relative.

The major downside to FHA insured loans is that you’ll be required to pay for private mortgage insurance (PMI) as long as your principal amount owed is less than 80%, or you’ve owned the loan for less than 5 years. You’ll also have to pay an upfront mortgage insurance premium (UPMIP) of 1% of the loan value at closing.

Paying the UPMIP and the monthly PMI for 5 years are new FHA requirements directly resulting from the mortgage meltdown. Prior to the meltdown, UPMIP didn’t exist and you could stop paying the PMI once your equity in the home was greater than 20% (meaning you owed less than 80% of the home’s appraised value).

Now, you’re looking at a lot of your closing costs and monthly mortgage payment going to mortgage insurance. For a home loan of $150,000, you’ll be paying $1,500 at closing for UPMIP. You’ll also be paying between .5% and 5% of the loan’s value per year for your PMI, or roughly between $63 and $625 per month for five years. The only way to stop paying PMI inside of the five year requirement is to refinance out of your existing loan into a new loan, assuming you have at least 20% equity.

This type of loan may be right for you if you have very little money for the down payment, or if your down payment will be coming from a gift.