FHA (Federal Housing Administration) loans provide borrowers with easier mortgage approvals, lower mortgage rates, and greater flexibility in the terms of the loan. The Federal Housing Administration insures FHA loans for lenders against the risk that borrowers default on their payments, so that the lender can then offer loans to borrowers who would otherwise pose too high of a risk, or offer better rates and increased flexibility on the terms of the loan.
FHA loans were designed to help borrowers with poor credit, higher debt-to-income ratios, lower down payment requirements, or bankruptcy/foreclosure histories to become homeowners. FHA loans are attractive for many first-time homeowners because of the easier mortgage approval process, lower down payment option, and competitive low mortgage rates.
Pros And Cons Of FHA Loans
FHA loans are easier to qualify for. The required down payment is only 3.5% of the home value, and you don’t need to have perfect credit. FHA loans are also “assumable,” which means that if you sell your home, the buyer can take over your loan.
The downside to FHA loans is that there are additional expenses, including the upfront mortgage insurance premium (which can be financed through the mortgage if necessary) and monthly mortgage insurance premium payments.
The upfront mortgage insurance premium is calculated regardless of an individual’s credit score as 1.75% of the total home loan. The annual mortgage insurance premium is simply added to monthly mortgage payments. It’s calculated based on the terms of the loan, its amount and duration, as well as the borrower’s loan-to-value ratio.
How Do I Qualify For An FHA Loan?
While FHA loan eligibility is determined on a case-by-case basis, there are several standard qualifications for borrowers:
3.5% required down payment must be made on the cost of the home, which is considerably less than the standard 20% down payment on non-FHA loans.
The home being purchased must be the borrower’s primary residence, and the property must be approved by an FHA appraiser to meet set standards defined in FHA guidelines.
The lender’s assessment of borrower’s front-end and back-end debt ratios must meet pre-determined guidelines.
The borrower must have a minimum credit score (usually 560) in order to receive maximum FHA benefits.
For more information on FHA loan requirements and costs, visit the U.S. Department of Housing and Urban Development (HUD).
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