How Does an FHA Mortgage Loan Save Money?

FHA Mortgage Loan is a mortgage loan issued by Federal Housing Administration, an US government agency that operates as part of Department of Housing and Urban Development. Created during the Great Depression, it was designed to open the path to home ownership for those who can't qualify for conventional mortgages. Compared to conventional mortgage loans, FHA mortgage loan is more affordable and easier to qualify for, allowing borrowers to save money in several ways.

How FHA Mortgage Loans Work

FHA Mortgage loans are financed by private lenders and insured by the federal government. The later part is important, since that is what makes loans so affordable. The mortgage insurance protects lenders against loss if the borrowers default on their mortgage. In conventional loans, they are paid by private securities which, as the most recent recession demonstrated, are as likely to lose their financial security as the borrowers. Federal government, on the other hand, is much more likely to remain stable. Unless the federal government suffers a complete economic and political collapse, the mortgage insurance will be paid. This, in turn, allows private mortgage lenders to give borrowers larger loans with less stringent terms and requirements.

Advantages of FHA Mortgage Loans

Compared to most conventional mortgage loans, FHA mortgage loans have lower down payments, better interest rates and lower fees. The value of the fees depends on the borrower's credit score.  The borrower doesn't have to make the down payment out of his or her own pocket. That money can come from a family member, a friend, an employer or a charitable organization.

FHA loans also allow borrowers to get more money then many conventional mortgage loans. According to the federal law, the borrowers can take out a mortgage for as much as 97% of the home's value, but the actual limits vary depending on the depending on the state and, in some cases, county and/or city.

Another major advantage of mortgage loans is the fact that borrowers can cancel their mortgage insurance once they hit certain benchmarks, allowing them to save money. Once the borrowers pay back 78% of their mortgage loans, they no longer have to pay their monthly premiums. That said, the 78% figure does not take into account any extra payments or any changes to the house's appraised value. Furthermore, unless borrowers can show that they  paid their monthly premiums in full for five years in a row, they would not be allowed to cancel their mortgage insurance until they do, even if they paid 78% of the mortgage loan.

Qualifying for FHA Mortgage Loans

In order to qualify for FHA mortgage loans, borrowers must meet the following requirements:

  • Minimum credit score - borrowers must have the minimum credit score of 620 in order to qualify for FHA mortgage insurance. If a borrower has no credit history, he or she can provide records of paid utility bills and rents to show that they have a history of meeting their payment obligations on time.
  • Foreclosure and bankruptcy limits - borrowers can't get FHA mortgage if they had a bankruptcy in the past two years or a foreclosure in the past three years.
  • Tax lien payments - borrowers must have their state tax liens paid in full. If they have unpaid federal tax liens, they must demonstrate that they can pay down the debt.
  • Employment requirements - borrowers must show that they had steady employment over the past two years with either steady or increasing income.