Your Lake of the Ozarks Mortgage Lender: Why Choose an FHA Loan?

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.

FHA loans have lower financial requirements, which can help borrowers get the mortgage they need to finance a home purchase with a lower down payment. First-time home buyers and low-to-moderate-income households typically obtain an FHA loan when they don’t qualify for a conventional loan.

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.