If you’re a first-time home buyer, low-income buyer, or a less than perfect credit buyer, don’t worry. The FHA (Federal Housing Administration) offers loans that fit a wide variety of borrowers, and their FHA loans act as their flagship initiative to make home ownership much more affordable. But of course, requirements still exist to get an FHA loan, and they have pros and cons as with any other loan.
What Is an FHA Loan?
An FHA loan is a type of federal mortgage that’s offered by privately owned lenders like Bank of America, Wells Fargo, and Chase.
The FHA itself doesn’t directly lend money to borrowers or approve loans. Instead, it works as a guarantor underwritten by the FHA, which means that it acts as the lender of last resort for a down payment, credit, and income-eligible borrowers who are otherwise either unable to get a traditional loan from a private lender or who couldn’t afford the high risk associated with such loans.
What Are the Requirements to Obtain an FHA Loan?
You’ll need to meet a few basic requirements to qualify for an FHA loan. First, your credit score should be at least 580. That might sound high, but know that the average credit score in the U.S. is somewhere between 690 and 720. Along with that, you need a down payment, which can be as low as 3.5%.
If you meet those criteria, you’ll more than likely qualify for an FHA loan.
What Are the Pros and Cons of an FHA Loan?
First of all, FHA loans are insured, which means that if you’re unable to make your monthly payment, the government will back the loan for up to six months after the mortgage is initiated. So, the lender isn’t at risk if you’re unable to pay.
For low-down-payment borrowers, FHA loans are a great option. If you don’t have enough cash to make a 20% down payment, then you’ll have to go with an FHA loan.
FHA loans also offer low-interest rates, which is a huge advantage, especially if you’re looking to get a 30-year fixed mortgage.
Speaking of fixed mortgages, that’s another big advantage of an FHA loan. In other words, you’ll know exactly what your monthly payment will be because you’ll be signing a fixed-rate mortgage.
There’s also a lot of flexibility in FHA loans. For example, you can combine FHA loans with many down payment options, including gift funds and seller contributions. You can also combine FHA loans with other types of mortgages, like a VA loan or a USDA loan.
Finally, FHA loans are great for people with credit issues. If you have bad credit and you can’t get approved for a conventional loan, then you should consider getting an FHA loan.
FHA loans also come at a cost. In other words, there will be a few extra costs associated with FHA loans that you might not have with a conventional loan, like mortgage insurance and an upfront mortgage insurance premium (UFMIP).
The upfront mortgage insurance premium can be anywhere from 1.75% to 2.25% of your loan amount, and it’s a one-time fee that you have to pay when you sign your mortgage.
FHA mortgage insurance is fairly similar to the upfront mortgage insurance premium. It’s a little more complicated, and there are a lot of variables, but the basic idea is that the mortgage insurance will act as a backstop in case you’re unable to pay. This can last as short as one month after your loan is closed or as long as up to 30 years.
The Bottom Line
The FHA loan is an option to consider if you’re looking to buy a house and you have a low credit score or a specific budget to work with. Of course, while it is indeed an attractive mortgage option for some people, it is not for everyone. So, weigh your needs and compare them against many mortgage solutions out there. If you need more help, feel free to consult with a loan professional for help!
Contact Loan Specialist Today With Buckhead Home Loans
Buckhead Home Loans is a brokerage shop that serves homeowners and homebuyers to find the loan they need to finally enjoy homeownership. If you are looking for home loans in Atlanta, reach out to us today at (404) 303-7411 to schedule a consultation.
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