FHA loan programs are more popular than ever, thanks to their attractive mortgage rates, low down payments, and easy-to-qualify-for requirements. The Federal Housing Administration, an agency within the U.S. Department of Housing and Urban Development (HUD), has been insuring mortgage loans to fund the purchase of homes throughout the U.S. since 1934.
To date, the FHA administers 15 types of mortgage programs for borrowers. These loans are coursed through lenders that will process and make these loans available to first-time buyers and other applicants who qualify for FHA loans.
Some of the more common types of FHA loans used for purchasing, refinancing or rehabilitating homes are as follows:
- FHA 30-Year Fixed Rate Loan
- FHA Adjustable Rate Mortgage
- FHA 203k Loan
- FHA 2/1 Buydown
- FHA Streamline Refinance
- FHA Cash Out Refinance
FHA 30-Year Fixed Rate Loan
This is the most common and traditional type of FHA-backed mortgage for single-family homes. Borrowers can take advantage of down payments as low as three and a half percent of the home’s purchase price, as well as closing costs that a portion of which may be paid by the seller or can be rolled into the loan. Interest rates may be negotiated between the purchaser and the lender.
Under FHA guidelines, the minimum down payment investment and closing costs can be given as gifts by friends and relatives of the borrower.
Here are some reasons why FHA’s 30-year fixed rate mortgage loan is popular among borrowers:
- Is offered by most, if not all, lending institutions approved by the FHA.
- Comes in simple to understand terms. Consider this: the rate of its interest is fixed throughout the life of the loan thus its monthly loan payments remain the same.
- The FHA loan program offers low downpayment options.
- Welcomes homebuyers with less-than-stellar credit record. For example, borrowers who have a 580 credit score, at the minimum, can be eligible for an FHA loan. This is also true for prospective homebuyers who have filed for bankruptcy in the past or have higher-than-ideal debt-to-income ratios. After all, FHA loans exist to encourage more people to own homes.
Consequently, the FHA 30-year fixed rate mortgage is ideal for borrowers who (i) intend to stay in/occupy their homes for years to come, (ii) like their mortgage payments to remain the same for budgeting purposes; and (iii) relatedly, take comfort in the idea that monthly payments will never change.
The 30-year fixed rate loan is also known as 203(b) loan, which also offers a 15-year fixed rate loan program.
Adjustable Rate Mortgage Loans (ARMs)
Also known as Section 251 loans, these mortgage loans are characterized by having an interest rate that changes in the course of the loan. FHA’s umbrella of ARM programs consists of 1-year ARM variant and four types of Hybrid ARM products.
One-year ARMs generally start with an interest rate higher than what its adjustable rate mortgage counterparts offer. Nevertheless, the first adjustment of its initial rate will not be as big, sparing borrowers from the shock of paying higher monthly mortgage payments.
For Hybrid ARMs, they offer an initial rate of interest that remains the same for the first three, five, seven or 10 years. After the applicable initial period, the interest rate will adjust every year. The corresponding interest rate cap for each FHA ARM product is as follows:
|Type of ARM||Interest Rate Cap|
|1- and 3- year ARMs||May see an increase by (i) 1 percentage point per year after the initial fixed rate period has passed and (ii) 5 percentage points throughout the life of the loan.|
|5-year ARMs||May allow for increases of (i) 1 percentage point every year and (ii) 5 percentage points during the term of the mortgage; or increases of (i) 2 percentage points per year, and (ii) 6 points over the relevant mortgage’s term.|
|7- and 10- year ARMs||May only increase by (i) 2 percentage points every year after the initial fixed rate period has passed, and (ii) 6 percentage points throughout the life of the loan.|
FHA 203K Loan
The FHA’s 203k loan program is sometimes referred to as “home improvement loan” or “rehab mortgage loan” that allows homebuyers to borrow funds to make certain improvements in their homes.
The 203k loan has two varieties: streamlined 203k that allows for not so extensive home-related projects with costs not exceeding $35,000, and standard 203k loan that is intended for structural changes such as repairing a structural damage and total repairs that exceed $35,000.
Over the years, lenders have partnered with government agencies and not-for-profit organizations to help in the rehabilitation of homes and the communities they are located in as part of the 203k loan program. To help homebuyers, FHA 203k loans have been combined with existing government housing initiatives such as the Department of Housing and Urban Development’s Community Development Block Grant Programs, HOME, and HOPE.
FHA 2/1 Buydown Loan
An FHA 2/1 buydown is applicable to fixed rate mortgages, whether 15- or 30-year fixed interest rate loans. This “buydown” allows the borrower to temporarily pay mortgage payments at lower rates for the first two years of the loan.
Say, during the first year of your mortgage, the mortgage payment will be calculated as 2% below the interest rate imposed on your 30-year fixed rate loan. On the second year, this mortgage payment will be calculated as 1% below the interest rate imposed on your 30-year loan. And then, for the next 3 to 30 years, the mortgage payment will be calculated based on the normal rate of the loan.
Temporary buydowns are done by setting aside money into an escrow account. Buydown funds may come from the borrower, seller, lender, or other interested parties.
FHA Streamline Refinance
If you hold an existing and current (not delinquent) FHA loan and want to refinance it for lower monthly payments, you may be eligible for the FHA’s Streamline Refinance program. FHA Streamline Refinance involves little paperwork so it speeds up the refinancing process to weeks. The process also does not require a new appraisal on the home so a borrower can reuse his/her home’s original appraisal.
Aside from the loan being current and already insured by the FHA, homeowners must prove that the refinance is needed and it will result in a net tangible benefit for them. They may not take out cash exceeding $500 on mortgages being refinanced under the streamline process.
Under FHA’s streamline refinance program, lenders may offer “no cost” refinancing transactions. Lenders do this by charging a higher interest rate on the new loan and taking the closing costs incurred in the refinancing transaction from the said premium. FHA does not permit lenders to include closing costs in streamline refinancing.
FHA Cash Out Refinance
The FHA’s cash out refinance is likened to opening a loan with a bigger balance than what is currently owed and taking out the excess proceeds. Borrowers previously can qualify for a cash out refinance of up to 95 percent of a home’s LTV or loan-to-value amount. Then, as per the HUD’s public statement dated March 12, 2009, the cash out refinances on or before April 1, 2009, shall not exceed 85 percent of the appraiser’s estimated value of the home.
The requirements for eligibility for a cash out refinance insured by the FHA include but are not limited to:
- A homeowner must own the property as his/her principal residence for 12 months, at the minimum, before the date of the cash out application to take advantage of the 85 percent of the estimated value of the new mortgage.
- A homeowner who is delinquent on his/her mortgage is not qualified for the cash out refinance.
- A homeowner may be required to hand out a second appraisal for cash out refinances that exceed $417,000 with the property located in a declining area per FHA’s guidelines.
Funds from the cash out refinance can be used towards educational fees, car loans, home improvement projects and other personal needs.
As a cash out refinance is deemed as a riskier transaction compared to a streamline refinance, borrowers are subjected to more documentation by the lenders.
Getting Started with Your FHA Loan
We have walked you through the different types of FHA loans that are common, popular and available in the market. And really, it’s up to you to decide which loan program would make the most sense to you.
So to help you in making that decision, we recommend you talk to a lender now and explore your options together. They would be able to discuss with you the requirements needed to qualify for an FHA loan.