How Does an FHA Loan Work?

Transcript

An FHA loan lets you buy a home with as little as three and a half percent down. That opens the door for a lot of buyers — but it comes with a cost that can follow you. Here's the whole picture. An FHA loan is insured by the Federal Housing Administration. Because the government backs the lender, they'll accept a smaller down payment and more forgiving credit. Here's the appeal. On a three hundred thousand dollar home, three and a half percent down is about ten thousand five hundred dollars — versus sixty thousand for a traditional twenty percent down payment. Now the cost. FHA loans carry mortgage insurance called MIP. There's an upfront fee of one and three-quarter percent — about five thousand dollars, usually rolled into the loan — plus roughly a hundred thirty a month. Against a conventional loan, the trade is clear. FHA is easier to qualify for. But its insurance is harder to shed — conventional PMI drops off at twenty percent equity, while FHA's MIP often lasts the life of the loan. Two things to weigh. With less than ten percent down, that monthly insurance can last the entire loan — refinancing is the usual way out. And the upfront fee, once financed, collects interest for years. See how an FHA loan pencils out on your own numbers at worthune.com. Worthune turns money decisions into math you can see and re-run — every assumption named. A friend who's good at math. One note: this is educational only, not financial advice. The figures are illustrative. Your situation is unique — talk to a professional before you act.

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