Government Insured FHA Mortgage Loans
FHA 203(b) (“government”) mortgage programs are offered by lenders for purchase and refinance loan transactions based on guidelines that are more flexible than those required for standard conforming (“conventional”) loans. This includes higher loan-to-value (LTV) ratios of up to 96.5%, lower credit scores, and flexibility on derogatory credit history.
These loans were created so that more people might qualify for homeownership after many borrowers went into foreclosure after the Great Depression in the 1930’s, as a way to stimulate the housing market. They are specially helpful to first time homebuyers. One of the advantages is that they allow potential home buyers to purchase a home with a lesser down payment (minimum down payment is 3.5% of the home’s value). Borrowers do not need to qualify for traditional mortgage insurance through private mortgage insurance companies as is required for home buyers with less than 20% down payment qualifying on conforming loan programs.
The cost for the government guarantee is carried by the borrower in two ways: 1) as an “Upfront mortgage insurance premium” (UFMIP) added to the closing costs or rolled into the loan amount, as well as 2) an additional cost in the monthly payment called the “Annual MIP”.