If you are planning on borrowing money for purchasing a home, FHA loans can make your dream come true. Read on to find out what an FHA loan is and how it can make homeownership a reality for you.
What is an FHA Loan?
FHA loans are government-backed mortgages that the Federal Housing Administration (FHA) secures. These loans are offered to home purchasers with lower minimum credit scores and down payments than most conventional home loans, making FHA loans a popular choice for a mortgage, especially for first-time homebuyers.
The government secures FHA loans; however, the arrangement requires the underwriting and administration by a third party – a private, FHA-approved lender.
FHA loans come in 15-year and 30-year terms against a fixed interest rate. Since the government provides the loans, and a third party is involved in securing the risk, the interest rates are lower than conventional loans, which gives someone with an average income and credit score the opportunity to become a homeowner.
However, while the interest rate is lower than conventional loans, mortgage insurance is required on the loan when borrowers pay less than 20% as a down payment. The insurance is designed to protect the lender’s loss in case the borrower defaults.
All FHA loans require the borrower to finance two mortgage insurance premiums: an upfront mortgage insurance premium and an annual mortgage insurance premium. The upfront mortgage insurance premium is 1.75% of the loan amount. In contrast, the annual mortgage insurance premium can range between 0.45% and 1.05% and depends on several factors, including loan term, the loan amount, and the initial loan-to-value ratio, or LTV.
How Do FHA Loans Make Home Ownership A Reality?
FHA loans come with several advantages that make homeownership a reality. Some of these advantages include:
Low Minimum Down Payment
For many homeowners-to-be, perhaps the most significant concern about homeownership is the inability to pay the down payment. FHA loans allow you to overcome this problem as the minimum requirement for the down payment for an FHA loan is 3.5%. Potential homeowners typically pay this amount from their own funds or via a gift.
Low Minimum Credit Score
Another reason why FHA loans make homeownership a reality is the minimum credit scores. The credit score to secure a loan with a 3.5% down payment is 580.
The low minimum credit score requirement for FHA loans allows for loan approval for individuals whose credit was adversely affected due to uncontrollable factors. Moreover, it also allows individuals with low credit scores to successfully re-establish acceptable credit history.
Flexibility for Underwriting
The underwriters for FHA can assess the credibility of the borrowers and differentiate between applicants who had valid reasons for their lapse of credit versus those who deliberately misuse credit. Moreover, borrowers who have a poor credit history but have established good payment patterns for FHA loans are usually treated more leniently.
Streamline Refinance Program
The FHA loan also features a streamlined refinance program that allows borrowers to easily refinance their mortgage to a home loan with better terms. In that case, the lender does not need to verify the borrower’s credentials, employment or income. Moreover, an appraisal is also not required, and there is no minimum credit score required for qualification. As a result, homeowners whose income, property values or credit scores have dropped may improve their financial position through a refinancing program.
How to Get Approved for an FHA Loan?
If you want to get an advantage and opt for an FHA loan, understanding the guidelines is a big help, and speaking with a trusted mortgage company is even better To learn more about how to secure an FHA loan to make homeownership a reality for yourself and your family, get in touch with Integrity Mortgage NMLS #1692497 today.