The Federal Housing Administration (FHA) loan is a popular government-backed mortgage loan choice, especially for first-time home buyers. This is primarily due to the fact that FHA requirements are less stringent than conventional loans.
However, that doesn’t mean FHA loan doesn’t protect lending agencies. The FHA loan program was in fact launched in response to the foreclosures and defaults that tool took place in the 1930s. The loan aims to improve the mortgage market by insuring mortgage loans made by approved lenders.
Consequently, this benefits both loan applicants and lenders. While borrowers are able to receive great rates, lenders are protected from borrower default.
In addition, borrowers can gain access to a number of different loan programs for different purposes, such as financing a major purchase or a renovation project, refinancing and more.
Before you apply for an FHA, it’s important to understand some facts about it:
Down payment
If you don’t have enough cash to make substantial down payment, then FHA loan is your best bet. Many approved lenders provide the loan at 3.5% down payment of the house value. Others may require a 20% down payment.
However, loan applicants must pay monthly mortgage insurance that protects the lender from a loss.
Credit score
In order to apply for an FHA loan, a borrower must have a minimum credit score of 580. This score is enough to qualify for the minimum down payment.
However, if an applicant’s credit score is between 500 and 579, they can still seek mortgage financing but they will make a 10% down payment.
Borrowers with a credit score as low as 500 can also qualify for the loan. However, they will have to follow certain guidelines.
Property
A potential borrower must make sure that the property they want to buy meets certain safety, security and soundness standards. This is because the property serves as collateral for the lender.
Interest rates
Coupled with lower down payment, the interest rates on FHA loans are lower than conventional loans.
As borrowers have to pay mortgage insurance, lenders are able to provide these loans at attractive rates.
Keep in mind, the FHA doesn’t set the interest rates. Borrowers can negotiate the rates with their lender.
Closing costs
A borrower’s closing costs can be covered by a house builder, seller or lender. These costs may include an appraisal, title expenses or a credit report.
A builder, for example, may agree to pay a borrower’s closing cost as an incentive for them to purchase a brand new home.
Loan qualification
The fact that FHA loans are insured and backed by the government makes the loan approval process easier and quicker than conventional loans.
If you’re struggling to qualify for a conventional mortgage loan, you may want to consider applying for an FHA loan. Contact us today to get the best rates and terms on all types of FHA loans.
