What Are FHA Loans?
FHA loans are backed by the Federal Housing Administration (FHA) and has made purchasing a home more affordable for many average families in the United States. While it’s a smart choice for many people, it’s always a good idea to really understand what an FHA loan entails. The decision to take on a mortgage is a huge one, and it can have effects that last up to 30 years. Carefully do your research before you make your decision.
Qualifying for FHA Loans
One of the biggest advantages of the FHA loan is that it has slightly looser restrictions when it comes to qualifying for the loan. Since the FHA loans are backed by the federal government, banks are able to offer these loans to those who have less than stellar credit. Homebuyers with credit scores as low as 500 can still purchase a home with this type of loan, though anyone with a credit score between 500 and 579 may be required to pay a slightly higher down payment. If someone checks with the bank and learns that he wouldn’t yet qualify for an FHA loan, the bank will likely refer that person to a credit repair company that can help him learn more about using credit responsibly and build up his credit.
Interest rates on FHA loans tend to be lower than conventional loans, but consumers should still shop around. Lending institutions are the ones that determine actual interest rates, so they can vary from company to company. It’s important to note that FHA loans can be both fixed and adjustable rate mortgages. In general, fixed rate mortgages are the smarter choice because you never have to worry about your payment increasing. If you can qualify for other types of mortgages, be sure to compare those to the FHA offerings. Depending on fees and interest rates, you may get a better deal with another type of loan.
Getting a down payment together is perhaps the most difficult hurdle new homebuyers face. Traditional mortgages can require up to 20 percent of the home’s value as a down payment. The down payment requirements are much lower for those applying for FHA loans. In most cases, the down payment needs to be just 3.5 percent, though those with low credit scores may need to come up with 10 percent.
Funding for Improvements
FHA loans sometimes also offer additional funding if you’re purchasing a home that needs improvements. This extra money can be used to fix minor issues or make energy improvements to the home. The loan for the improvements can be up to $25,000 and will be wrapped into the cost of your original loan. For example, if the home costs $150,000, you could take out a mortgage for $175,000, assuming you qualify for that amount.
When you sign the final paperwork, you usually have to pay the “closing costs.” These usually include some interest on the loan, and other fees associated with loan processing. In general, closing costs are less expensive for FHA loans than for other types of loans. Additionally, FHA loan regulations allow for people other than the homebuyer to pay these closing costs. Sellers, builders or lenders may offer to pick up the closing costs in order to make the deal happen.
Financial Hardship Options
When you go through the mortgage application process, the lender does everything possible to limit the borrowed amount to something that will be affordable for you. However, things can happen that are out of your control. If you suffer an injury that causes you to lose income or you lose your job and are having trouble finding a new one, it can be hard to make your mortgage payments. Sometimes, if you have an FHA loan, the lender can allow you to receive forbearance, or postpone the payments until you can get back on your feet again. This is only allowed in certain circumstances, but it’s good to know about if things go wrong.
If you have an FHA loan, you are able to refinance it down the road if that’s something you choose to do. You might look into this if there’s been a decrease in interest rates of if you want to use some of the equity in your home to make improvements. You could also refinance into a non-FHA loan, which might be an option if your credit score has improved. Doing this could possibly lower payments, as you won’t have to pay mortgage insurance premiums that might be a part of the FHA loan. Refinancing is something to consider after you’ve owned the home for several years.
FHA loans are a great option for those struggling to buy their first home. It’s often the one thing that can make homeownership affordable for many people. However, you always want to compare all of the options available to you before you make your decision. Contact Chris Doering Mortgage today and find out if an FHA loan is the best option for you.