Understanding How an FHA Mortgage Loan Works

FHA mortgage loans allow consumers with little or poor credit scores to gain access to home mortgage loans with competitive rates because an FHA mortgage loan operates like mortgage insurance. FHA mortgage loans charge borrowers a percentage of the total loan in order to cover the cost of federally-backed loan insurance. However, most financial experts agree that the cost of FHA mortgage insurance is a small price to pay for competitive interest rates on the mortgage loan itself, especially if you are a borrower with little or poor credit.

FHA Mortgage Insurance

The FHA generally charges borrowers a 1.5% insurance premium on their mortgage loan. In addition to this, borrowers are expected to be able to make an upfront down payment of 3% if they are buying a house. This is a significantly less than the 5%-20% often demanded by conventional mortgage lenders.

FHA Mortgage Loans Available

FHA mortgage loans are diversely suited to fit consumer needs. In addition to the many housing loan programs offered through the Department of Housing and Urban Development, three of the most-used FHA mortgage loans are 203(b), cash out refinancing, and streamline refinancing mortgage loans.

First Time Buyers

Many individuals use the 203(b) FHA mortgage loan to purchase a home. Because this mortgage loan requires only a 3% down payment and charges 1.5% for mortgage insurance, it is a popular FHA loan for first time buyers. Home buyers who choose the 203(b) FHA mortgage loan often include students, newlyweds, recent graduates, and immigrants. Because of its low interest rates, it is also an excellent choice for qualified individuals recovering from poor credit history or bankruptcy.

Current Homeowners

Because FHA mortgage loans are easily accessible and provide consumers with competitive interest rates, many homeowners choose to refinance their homes through FHA. As long as you have owned your home for at least one year, you can apply to refinance your home for up to 85% of the appraised value. This is especially desirable if FHA will offer you better interest rates than your current lender. Individuals who presently have an FHA mortgage loan in good standing are encouraged to refinance under a lower interest rate through an FHA Streamlined Refinance Basic Loan. While this option doesn't provide the refinancing borrower with cash directly, it does cut monthly payments and/or total duration of payments through decreased interest rates.