||Ask Dr. Don
FHA mortgage loans
Dear Dr. Don,
Please explain the difference between a 30-year fixed and a 30-year
FHA loan. My understanding is that the conventional fixed-rate loan
requires 20 percent down and the FHA loan does not. Also, is there
a 15-year FHA loan? I see that fixed rates are lower as well.
Thanks in advance,
The Federal Housing Administration provides a loan guarantee program
in lieu of private mortgage insurance so qualified borrowers can
get a mortgage loan with a low down payment.
The FHA library will show you
how to qualify for a FHA loan and how to find the
FHA loan limits in your state. The FHA doesn't lend you the
money, they guarantee the loan, so the lender doesn't take on a
financial risk by extending you credit.
The most popular FHA loan has a minimum cash investment
requirement of 3 percent but permits 100 percent of the money needed
at closing to be a gift from a relative, nonprofit organization
or government agency.
FHA lending guidelines are not as strict as the Federal
National Mortgage Association (Fannie Mae) or the Federal Home Loan
Mortgage Corporation (Freddie Mac). Sellers must pay part of the
closing costs, while some of the borrower's closing costs can be
included in the loan amount.
FHA loans are assumable, meaning you can transfer
your loan to the new owner if you sell your house. That allows the
new owner to take over your FHA loan without the additional cost
of obtaining a new loan. To assume the loan, the buyer has to meet
the credit standards for the loan. This feature can make it easier
to sell your home.
There are three FHA loan programs:
1. FHA 203(b) fixed-rate mortgage (15- up
to 30-year loans)
2. FHA 251 adjustable-rate mortgage (1-, 3-, 5-, 7- or
3. FHA 2-1 buy-down loans
There's also an Energy Efficient Mortgages program
that allows homeowners to finance adding energy-efficient features
to new or existing homes as part of either their home purchase or
FHA refinancing. You can learn more about these loans in the FHA
The biggest disadvantage to FHA loans is the mortgage
insurance premium. In most 15- or 30-year FHA loans, the borrower
pays 1.5 percent of the loan amount at closing, along with a 0.5
percent annual renewal premium paid annually over the life of the
But, similarly to private mortgage insurance, on all
mortgages originated after Jan. 1, 2001 that have an upfront premium,
the annual private mortgage premium is canceled when the homeowner's
equity reaches a 78 percent loan-to-value ratio, or five years,
whichever takes longer. You may also qualify for a partial refund
of the upfront mortgage insurance premium if you owned your home
for less than five to seven years. It's five years for loans closed
after Jan. 1, 2001 and seven years for loans closed before Jan.
1, 2001 and after September 1983.
You need to shop rates when looking for a FHA mortgage
just as you would with a conventional loan because the rates are
established by the lender, not the government. FHA loan rates are
typically higher than conventional (nongovernment guaranteed) loan
rates but shouldn't be a lot higher unless you have credit problems.
Before you start applying for loans you should request
a copy of your credit report from at least one of the three major
credit bureaus and get a credit score from them as well. Review
the report for errors. If you find any, use the dispute-resolution
process to correct the report. Bankrate provides contact
information for the credit bureaus and a guide
to handling the dispute-resolution process.
-- Updated: June 18, 2004