Everything You Need To Know About FHA Loans
Are you a first-time home buyer? Do you need to apply for a home loan, and have you managed to save up a down payment on a home? If you have replied yes to the above questions, the good news is that there are different loan options available to you. Even if you are not a first-time home owner, you will still need to take out a mortgage to purchase your home (unless you are a cash buyer). As one of the options, the purpose of this article is to concentrate on the FHA mortgage program.
What is an FHA loan?
In a nutshell, an FHA loan is a loan that is insured by the Federal Housing Administration. The FHA is a government organization, whose aim is to promote home ownership in the USA. Therefore, because the home loan is guaranteed, lenders are willing to approve mortgage loans to applicants who would otherwise not qualify. Ergo, the application criteria for an FHA-insured loan is less stringent than those of a conventional mortgage.
Advantages of the FHA Loan Program
There are several benefits of FHA home loans compared to conventional loans:
Low Down Payment Requirement
The FHA loan program allows you to pay a deposit of 3.5% whereas the deposit for a conventional mortgage is usually around 5%. It goes without saying that the more cash you can put towards your down payment the better as it will reduce your loan amount; thereby, reducing your monthly repayments as well as your total amount (including interest) that you need to repay the lender.
Not only can you use your cash savings for the down payment, a gift from a family member, or a government or state grant, but can also be used as a down payment on the loan.
Sellers Concessions for Closing Costs
In a nutshell, closing costs are the hard costs involved when purchasing a home. Such fees are the title expenses, loan origination fees, a credit report, an appraisal, as well as a survey of your new home. The FHA allows the seller, builder, or the financier to pay up to 6% of the Sales Price to cover the closing costs on behalf of the borrower. For example, the seller might offer to pay the closing costs as an additional incentive to purchase the house that is for sale.
Credit Score Requirement
FHA loans are the most lenient of all loan programs available. A borrower must have at least a 580 mid-FICO score to qualify for a 3.5% down payment requirement. As mentioned before, the purpose of an FHA-backed mortgage is to encourage home ownership. Therefore, credit scored needed by applicants for an FHA loan is not as high as the score required for the application of a conventional mortgage loan. In other words, it is easier for an applicant to be granted an FHA loan than a conventional loan. As compared to a conventional loan, a borrower must have at least a 620 FICO score to qualify.
People with a middle FICO score lower than 580 can still qualify for an FHA loan. However, they will be required to come up with at least 10% down payment.
The buyer can take over the existing mortgage
Should you be the seller, and you have an FHA-insured loan, you can make the mortgage assumable and transfer it into the new owner’s name. It is important to note that the buyer still has to qualify for the loan; nevertheless, it is likely that a portion of the loan has been paid off so the qualification criteria should be less. Therefore, it will be easier for the buyer to qualify to take over your mortgage.
FHA has the section 203(k) loan program that can incorporate the cost of renovation and the price of the home in one. Not only can an FHA loan be used to purchase your home, but it can also be used to renovate and improve the property you’re buying. If you’re looking to purchase a property that needs extensive renovations, you will be in a position to do so with an FHA loan.
Temporary Hardship Relief
Should you end up in a situation where you cannot repay your FHA loan, the lender can offer some form of temporary relief. This assistance can include the modification of the repayment period, lowered interest rates, or the deferment of part of the loan for an extended period.
The crux of an FHA home loan is that it is insured and backed by the Federal Government. Consequently, no matter what happens, the Federal Housing Administration has an insurance policy in place that guarantees the loan. The result is that the lender can provide benefits to the borrower because there is a small risk that the lender will lose the money that is part of the loan.