FHA Loan Types

FHA Mortgage Options

With an FHA home loan, the actual financing is provided by a bank or other type of lending institution and the mortgage is insured by the FHA. But how does that insurance work, and what does that mean for you as the borrower? Your mortgage is a secured loan, which means if you run into unforeseen circumstances and are unable to make your mortgage payments, the bank can (and will) repossess your house, also known as a foreclosure. Once your lender starts foreclosure proceedings, it puts your house on the market in an effort to recoup some of what is owed on the loan. However, houses in foreclosure often sell for way below market value, causing your lending institution to lose potentially hundreds of thousands of dollars. However, if an FHA loan goes into foreclosure, the bank can put in a claim for the difference between what they recoup on the sale and the outstanding balance on the loan. This mitigates the risk of loaning money exponentially.

Because of this, FHA eligibility requirements are a bit more relaxed. If you can swing a 3.5% down payment, have a credit score of at least 580 and can prove steady employment and income, chances are good that you’ll qualify. And,if you actually have enough money to put down a 10% down payment, you can get approved with a credit score as low as 500. But what if you’re not looking for a typical, 30-year fixed mortgage? Most people don’t realize there is a wide variety of FHA Loan programs available to those who qualify. Read on, you may be surprised at what your options are!

FHA Fixed Rate 203(b) Loan

This is the loan that most people think of when asking about an FHA home loan, and it also happens to be the most popular. It’s a straightforward mortgage meant to finance a primary, single-family residence and is the program most similar to conventional financing. The majority of these loans are a 30-year fixed rate mortgage, meaning whatever interest rate you lock in during the application process stays for the life of the loan and your monthly payment never changes. You can also opt for a 15-year fixed rate FHA mortgage, but the monthly payment on these loans is often out of reach for most people. You can also use the FHA 203(b) loan to refinance a current FHA or conventional mortgage.

FHA Adjustable Rate Loan

In direct contrast to a fixed-rate mortgage, with an FHA adjustable rate loan your interest rate is fluid. Your rate will fluctuate over the life of the loan. FHA adjustable rate mortgages are made up of four different components:

1. All adjustable rate mortgages start with an Initial Interest Rate period. Depending on the type of ARM you have, this period offers an initial interest rate that lasts for one, three, five, seven, or ten years. This rate is lower than a typical fixed rate mortgage.
2. The Index is what the foundation of your interest rate is based on. FHA Adjustable Rate Mortgages use one of two indexes. One is the Constant Maturity Treasury index, also known as the CMT index. This index is made up of the weekly average yield of US Treasury securities adjusted to a one-year maturity. The other is the one-year London Interbank Offered Rate (LIBOR).
3. Once your initial interest rate expires, your new rate is calculated based on one of the indexes mentioned above plus something called your margin. Your margin is established as part of the initial loan process, so you will know your what your margin is ahead of time. So, if the interest rate on the CMT is 3.5%, and your margin is 2.25%, your new interest rate would be 5.75%. It’s important to know that the margin is set by the lender, so it’s a good idea to shop around for the best rate.
4. The final part of your ARM is the Interest Rate Cap, which provides you some protection from large swings in your interest rate. There is a cap on both the yearly interest rate and the interest rate over the life of the loan. This safeguards you against monstrous rate increases that would jeopardize your ability to pay your monthly mortgage payment.

An ARM may sound like a bit of a gamble, but it’s advantageous for people who believe their income will rise in the near future, or who don’t plan to stay in the house for very long. It’s a good idea to talk to you lender to see if you would benefit from an FHA backed ARM.

FHA Condominium Loan

This loan is similar to the standard FHA 203(b) loan discussed above but geared toward those who wish to purchase a unit within a condominium complex. There are additional requirements when applying for this type

of loan, but nothing that should keep you from finding the perfect condo. The biggest catch is that whatever condo you choose needs to be part of an FHA-approved project. A development must be in full compliance with all state law requirements, be in good standing with the State, and meet all FHA guidelines with regards to insurance, financial and physical property condition and whether there is any pending legal action against said condo association. Your best bet is to use the HUD Database to find condominiums that are already in good standing with the FHA.

FHA 203(k) Rehab Mortgage

This loan is an amazing perk if your current home or a home you’re looking to purchase is in need of major renovating. If the home is at least one-year old,the 203(k) Rehab loan allows you to finance a purchase and a renovation project in a single loan. An FHA 203(k) is the perfect financing option if you fall in love with a fixer-upper or need to renovate your kitchen to help your current home sell faster. It can be used to install larger windows, finish a basement or add a garage if one doesn’t already exist. In order to qualify, the cost of the rehabilitation must be a minimum of $5,000, and you can add up to $35,000 to improve or repair a home.

The rehab money is placed in escrow and paid out as work is completed. You can also take advantage of this loan as part of a

refinance. This is a great program that has contributed to the revitalization of many communities.

FHA Energy Efficient Mortgage

If you’re looking to reduce the cost of your utility bills or minimize your impact on the environment, the FHA Energy Efficient Mortgage, also known as the FHA EEM, may be just what you need. In the early 1990’s, it became apparent to the FHA that if people had the ability to lower their utility payments, they could afford a larger mortgage that included energy efficient improvements. Therefore, they decided to allow certain energy packages to be financed in addition to the traditional mortgage payment. As the purchaser or owner of the home, you would need to complete an official Home Energy Assessment which itemizes the upgrades that are most beneficial, the estimated cost to do those improvements and how much money the homeowner is expected to save. Your FHA-approved lender can help you determine the maximum dollar amount available to you for these improvements.

FHA Disaster Victims 203(h) Mortgage

If you find yourself the victim of a Presidentially designated disaster area, you may qualify for the FHA 203(h) home loan. People who had their homes taken from them due to tornadoes, hurricanes, flooding or fires often face special financial challenges. This program is intended to help people in this situation re-establish themselves as homeowners after such a loss. The terms are very similar to the standard 203(b) mortgage with some additional benefits to assist the victims such as 100% financing. A loan of this type must be applied for within one year of the Presidential declaration of the disaster.

FHA Reverse Mortgage for Seniors

The FHA offers a special program for seniors who have equity in their homesand want to use it to supplement their income. It’s called the Home Equity Conversion Mortgage. Depending on how much equity is available per an FHA appraisal, a borrower can receive money against the value of the equity. The amount of money received is added to the principal of

the mortgage and accrues interest, however no payments are required until the home is sold or the upon the death of the borrower. It is similar to a Home Equity Loan, with the major difference being that an HELOC requires payments on the amount advanced whereas the HECM does not. To qualify for the HECM, you must be at least 62 years of age and be in possession of a property that is owned outright or with a high amount of equity. If you do have a current mortgage, it must be in good standing with no delinquencies, and you must have no delinquencies on any other federal debt.

FHA Streamline Refinance

If you are considering refinancing your current FHA Mortgage and aren’t looking to take out any additional cash, this is definitely something you should consider. They call it a streamline refinance because there is limited documentation needed to complete the transaction. Often people use this to refinance their current mortgage in order to take advantage of a lower interest rate. In fact, one of the qualifying guidelines is that there must be what called a “tangible benefit” to the borrower. The definition of this will change based on the type of loan being refinanced, and your FHA approved lender can go through those with you. Although the documentation process is quicker and simplified, there are still loan and closing costs that should be considered when deciding to refinance.

A Plethora of Choices

If you are looking to finance a home but are worried about your credit history or the amount of money you have available for a down payment, an FHA insured loan may be right for you. And as you can see, with such a wide array of choices, you can find a loan to cover almost any financing situation you run into. Our team here at Community First National Bank

is here to listen to your needs and work with you all the way through the loan process.

Get started by calling us at 855-971-1050.