Should You Apply for FHA Loans?

Owning a home is the ultimate dream of most people. A home provides not only shelter but safety and security as well. However, in today’s modern time, buying a house or signing up for house loans can be very costly, not to mention the other factors that come into play such as credit scores and financial histories. In such cases, FHA loans can help people with modest earnings own a home.

What is an FHA loan?

The FHA loan is a mortgage-backed by the federal government thru the Federal Housing Administration. To lessen the risks posed by potential defaulting of payments, the government insures the loans given out by FHA-approved lenders. Because of this, the FHA loan requirements of financial institutions are more accessible, and the interest rates are more attractive than those of regular home loans. This loan program was designed by the government to help boost homeownership in the United States.

fha loan definitionWhat are the upsides of FHA loans?

What makes FHA loans ideal for people with lower financial means is that there is no minimum income requirement as long as the borrower can show continuous and steady employment in the last two years.

Compared to conventional mortgages that require a credit score of 620 or above to qualify, banks and financial institutions that offer FHA loans still consider and accommodate borrowers with at least a credit score of 500.

The minimum down payment requirement is another advantage of FHA loans over conventional loans. Where non-FHA loans mostly require 20% of the home’s total purchase price as down payment, FHA-insured mortgages can be acquired with a down payment as low as 3.5%. For a better perspective, a house that costs $300,000 would need a $60,000 down under conventional mortgage, but with the FHA loan, the borrowers would only need to come up with $10,500.

Aside from employment, the source of income, and down payment, there are many other FHA loan requirements that the borrowers need to comply to be approved. Self-employed individuals can also qualify for FHA loans, but sole-proprietors need to present more documentation than employed applicants. Gathering all the necessary documents and paperwork takes time and effort and should be expected when applying for home mortgage loans, FHA or otherwise.

What are the downsides?

The less stringent conditions of FHA loans make it very appealing, but like most things, it also has its downsides.

Due to the low down payment and other financial solvency matters, two kinds of mortgage insurance premiums apply to all FHA loans. The first is an upfront insurance requirement of 1.75% of the loan amount, and the other is the monthly mortgage insurance premium amortized over the life of the loan and divided into equal monthly payments.

Only FHA-approved banks, lenders, and mortgage companies can offer an FHA loan. However, it can be a little more challenging for a property to qualify for an FHA insurance because the Department of Housing and Urban Development (HUD), which is responsible for the FHA, have a minimum requirement for the type of properties that can be covered. The potential homes are subject to pretty rigorous inspections and appraisal processes by HUD to ensure that they are up to standards. The HUD also has strict rules about condominium properties. Condos are only considered when they are in the HUD-approved condo list.

Is it the right loan for you?

The FHA loan is aimed towards families whose means of income make them ineligible for home loans under the traditional terms. However, it is not the only option. For those who served in the military, the Department of Veterans Affairs offers a VA guaranteed home loans. This no money down home loan program provided by the VA is available to all servicemen and women, along with their eligible spouses.

The low-down payment conventional mortgage is also available for those who have good credit standing but cannot afford the hefty down payment price. Going for a conventional loan has its advantages and may prove to be more practical in the long run especially regarding the mortgage insurance premium. FHA loan’s Mortgage Insurance Premium (MIP) is for the life of the loan and cannot be cancelled. On the other hand, a conventional loans Private Mortgage Insurance (PMI) cancels when the balance reaches the 78% of the original purchase price.

Getting a home mortgage is the most significant decision a person can make personally and financially. It is a decision that should not be rushed or taken lightly. When in doubt, consult an FHA Loan Specialist who can help shed light on whether or not an FHA loan is the appropriate choice.

By Paul