Purchasing a home with an FHA-insured loan allows the buyer to buy the home using a much lower down payment than the normal 20 percent down required by mortgage lenders. FHA loans are originated by mortgage lenders to satisfy the criteria of the FHA insurance program. The trade off to the reduced down payment need of an FHA loan is a few additional costs.

History

Back in January 2009, the minimum down payment for an FHA mortgage has been changed from 3 percent to 3.5 percent. In ancient 2010, an additional level of deposit requirement has been created for prospective buyers with bad credit ratings. An FHA mortgage for a borrower with a credit rating of less than 580 requires a 10 percent deposit.

Function

Most home buyers that buy an FHA-insured mortgage will be eligible to pay the 3.5 percent down payment. The deposit amount is calculated by multiplying the home purchase price times 3.5 percent, or 0.035. By way of instance, the required down payment on a $350,000 home could be $12,250. The home buyer would have to bring this amount and any additional closing costs when the papers are signed to buy the house.

Outcomes

Buyers using an FHA-insured mortgage to buy a home are required to pay an upfront mortgage insurance premium, or MIP. In 2010, the MIP percentage was 2.25 percent of the loan amount. In our case of the $350,000 home, the amount of the loan will be $350,000 minus the $12,250 down payment$337,750. Multiplying 2.25 percent times that this amount offers an MIP amount of $7,599. This insurance premium can be paid in cash by the buyer at closing or rolled into the mortgage loan amount. To keep the cash necessary to buy the house to a minimum, many buyers include the MIP in the home mortgage.

Considerations

The 3.5 percent down payment might not be the only costs to buy a home. A home purchase has added costs called closing costs. Closing costs include loan origination points, appraisal costs and title insurance. FHA rules permit the seller to pay closing costs up to 3 percent of the cost of the home. The seller is not required to pay these costs, but it’s something that may be negotiated to the purchase contract.

Significance

To receive an FHA-approved mortgage, a home buyer should satisfy the FHA qualifications along with also the amount of the loan should not exceed the limit set by the FHA to your region of the home. In the San Francisco Bay region, FHA loan limits are mostly in the FHA maximum of $729,750 in 2010. Some outlying areas like Sonoma and Vallejo County have reduced limits for FHA loan numbers. If the amount of the loan will be at or below the FHA limit, the deposit will be 3.5 percent of their purchase price.

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