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An FHA Mortgage is a Mortgage that is guaranteed or insured by a government agency.
The Government agencies that insure or guarantee these loans are the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA.) The FHA is a part of the Department of Housing and Urban Development and insures residential mortgage loans made by private lenders. The FmHA provides financing to farmers and other qualified borrowers who may have trouble getting loans. VA loans are for veterans or members of the military and can have a lower down payment.
FHA Mortgages are known for there more lax underwriting requirements over the more common Conventional types of Mortgages. As little as 3% is required as down payment and can be a gift in most instances. The interest rates of FHA loans are also typically .25 to .5 lower than that of its Conventional counterpart.
The downside to the FHA Mortgage, however, is the Upfront Mortgage Insurance Premium (UFMIP) which is currently 1.75% of the loan amount. This fee can be included or "rolled" into the loan so as to not be required of the borrower to pay out of pocket. This amount also does not affect the LTV for example: if the purchase price of a home is $100,000, and the down payment is $3000, that makes the loan amount $97,000 and an LTV of 97%. Once the UFMIP is added into the loan amount, it now becomes $98,750 ($1,750 being 1.75% of $100,000.) One would logically think that the LTV now becomes 98.75%, however, as mentioned before, the UFMIP does not affect the LTV so the LTV remains 97%.
FHA mortgages also have an annual MIP. This premium is paid by the borrower each months in addition to their regular mortgage payment and is determined by the size of the original down payment and the loan amount. .