5 Critical Things to Know About an FHA Loan
Buying
If you’re in the home-buying market, you’ve likely heard of an FHA loan. While this term floats around the housing market, few people actually understand what it means. Unfortunately, FHA loans have become very popular with borrowers around the country, and not knowing the ins and outs of this unique loan can but buyers at a disadvantage.
What is an FHA Loan?
An FHA loan is simply a mortgage that is fully insured and backed by the Federal Housing Administration (FHA). In an FHA loan, the borrower purchases mortgage insurance, which helps to insulate the lender from losses should the borrower default on the loan, and this is precisely what makes them so attractive.
Because FHA loans are insured, lenders can offer them at lower rates and qualify more people for them. This makes them widely accessible to a large segment of home buyers.
5 Things to Know About FHA Loans
To fully understand why FHA loans are so popular, consider the following facts:
1. People with imperfect credit can apply for and receive FHA loans
While a poor credit score has historically been a barrier to getting a loan, FHA loans even the playing field a bit. While the minimum credit score required depends on the type of loan a homebuyer is applying for, many FHA loans are granted to people with credit scores of 580 or above.
2. Down payments are lower with FHA loans
With an FHA loan, down payments are incredibly minimal. While the standard down payment for a traditional loan is between 10-20%, the down payment with an FHA loan is only 3.5%. This makes home buying an option for more borrowers. What’s more, FHA loans also allow purchasers to use financial gifts from family members or grants from home-buying assistance programs to fund their down payment.
3. FHA loans often waive or shift closing costs
In a traditional mortgage situation, closing costs can be massive, and few homeowners are prepared. Luckily, an FHA loan often requires a lender, seller, or even a builder to cover some or all of the closing costs. While this may come with a small interest rate increase, it’s a huge attraction for many buyers.
4. FHA loans allow buyers to take out a loan for home repairs and improvements
If you find that you need some additional capital to repair or improve your home, your FHA loan can help you facilitate this. This loan offering, known as a 203(k), is designed to help borrowers finance home repairs to improve home value.
5. An FHA loan may offer relief in the event of difficult financial times
While you’ll still need to make your mortgage payment, even if you fall on tough times, an FHA loan can contribute to making it easier. If you find yourself in a time of difficult financial straits, these loans offer temporary forbearance or loan modifications.
FHA loans are popular among borrowers, and knowing these five crucial facts can help you decide whether an FHA loan is right for you!
