There are a variety of loan products and the 4 most commonly used are Conventional and Government Loans like FHA, VA, and USDA.
The Federal Housing Administration (FHA) offers insurance to lenders if they lend to certain qualified individuals following specific guidelines. FHA loans date back to right after the great depression. At the time banks would only lend 50% of the value of a home and ownership was hard to come by if you were not wealthy. FHA introduced this insurance concept which replaces the protection the lender normally receives by requiring a down payment. FHA put ownership in reach of millions of Americans by allowing a borrower to obtain favorable financing terms with less money out of pocket.
FHA-insured loans offer more flexible guidelines than a traditional conventional loan, are more accepting of lower credit scores and allow for as little as 3.5% down payment. The maximum allowed loan in Pima County with an FHA insured loan is $314,827 for a single family residence.
The benefit, however, comes with a catch. To obtain mortgage insurance from the Federal Housing Administration, a mortgage insurance premium (UFMIP) equal to 1.75 percent of the loan amount at closing is required, and is normally financed by the lender and paid to FHA on the borrower’s behalf. There’s a monthly premium (MIP) as well, which is paid by the borrower as part of the monthly payment.
Even with the insurance costs, FHA is structured in a way to help make home buying an option for many who would otherwise be unable.
Local Down Payment Assistance programs are often tied to FHA loans (though not always) and since FHA allows a seller to pay up to 6% of the sales price towards buyers closing costs. It is possible to purchase a home with an FHA loan and have little or no money out of pocket.
We provide a full review of options for the borrower to make sure the loan they end up with is best for their situation and goals.