An FHA loan is a mortgage loan the Federal Housing Administration (FHA) insures. The FHA is part of the U.S. Department of Housing and Urban Development (HUD). This protects the lender if the borrower defaults on the loan, making it less risky for lenders to extend mortgages to individuals who might not qualify for conventional loans.
Benefits Of An FHA Loan
FHA loans offer borrowers advantages to increase
accessibility and affordability. Here are the benefits of an FHA loan to
expect:
1. Lower Minimum Credit Scores
FHA
loan credit score minimum requirements are typically lower than
conventional financing, depending on the lender. This can help
credit-challenged borrowers qualify for a mortgage.
2. Low Down Payments
The down payment requirements for FHA loans are
3.5% of the loan amount for borrowers with credit scores of 580 or higher. For
comparison’s sake, conventional loans usually require 5% down unless you’re a
first-time home buyer or make not more than 80% of the median income in your
area.
Remember, the down payment is separate from closing costs,
which cost 3% to 6% of the purchase price. So, you’ll need funds to cover both
the down payment and the closing costs, including origination fees, MIP fees
and appraisal fees. Fortunately, the reduced down payment could help you afford
the closing costs.
3. Favorable Interest Rates
FHA loans have backing from the federal government, meaning
your lender will still receive payment if you default on your loan. For this
reason, FHA loans have competitive interest rates, increasing the affordability
of your monthly mortgage payment.
4. Compensating Factors for Applications
FHA loans help borrowers with blemished financial
situations, such as a lower credit score or income. Compensating factors
increase the likelihood of approval when you apply for a loan. Specifically,
lenders consider your cash reserves, income from other sources, monthly debt
payments, how much the loan increases your housing costs and your desired
home’s energy-efficiency. These aspects of your application can offset a DTI or
credit score that isn’t ideal as long as DTI is still within the product
limits.
5. Repeated Use
FHA loans are advantageous for first-time home buyers
because of the relaxed financial constraints. However, borrowers can use them
as often as they wish. As a result, you can apply for an FHA loan whether
you’re buying your first home or downsizing for retirement.
Other FHA Loan Requirements
1. Appraisal and Inspections
Because the government requires homes to meet several
minimum quality standards, borrowers must pay for an appraisal. The FHA
appraiser will come to the home and spend a few hours inspecting it for issues.
If they discover any, it’s up to the buyer to negotiate with the seller over
fixing the problems.
2. Mortgage Insurance Premiums
FHA loans require borrowers to pay mortgage insurance premiums (MIPs) at
closing and throughout the life of the loan. Specifically, you’ll pay 1.75% of
the loan amount at closing as your upfront MIP. There will be an additional MIP
included each month in your mortgage payment. The upfront MIP can be included
in your loan amount instead of paying the lump sum at closing.
The Bottom Line
An FHA loan allows first time home buyers with low to
moderate incomes and less than 20% down payment funds to achieve homeownership.
The appeal of FHA loans lies in their lower financial requirements, including a
reduced down payment, more flexible credit score criteria and less strict
debt-to-income ratio requirements. These features make homeownership more
accessible to individuals who are unable to qualify for conventional loans.
As with any financial decision, borrowers should explore all loan options to make an informed choice that aligns with their homeownership goals.
Team Lasson is here for all of
your home buying needs! If you’re
thinking about making the leap into home ownership in the near future, please
contact us today to get started. We can
help you determine what loan program works best for your financial goals. The first step in preparing for your big
purchase is to get pre-approved for a mortgage at Lake of the Ozarks. Please visit www.yourlakeloan.com or
give us a call at (573) 216-7258 to get started.
Senior Mortgage Banker
NMLS #: 493712
Flat Branch Home Loans – Team Lasson
2882 Bagnell Dam Blvd
Lake Ozark, MO 65049
Cell: (573)
216-7258
Email: teamlasson@fbhl.com
Website: www.yourlakeloan.com
**The postings on this site are my own
and do not necessarily represent Flat Branch Home Loans positions, strategies,
or opinions.
Flat Branch Home Loans
NMLS 224149. A Division of Flat Branch Mortgage Inc. For more licensing
information, visit NMLSConsumerAccess.org
