FHA loans can be a great choice for many homebuyers. Backed by the Federal Housing Administration, these mortgages have low down payments and can be excellent for buyers with less than stellar credit scores. Let’s take a closer look at these loans and how they can help you bring your dream of homeownership to life.
What is an FHA loan?
First of all, an FHA loan is a mortgage that is backed by the Federal Housing Administration. This means that a lender is protected should a borrower default. They are popular loans for first-time buyers and those with smaller savings or lower credit scores. FHA loans are only available through FHA-approved lenders. Borrowers can pay as little as 3.5 percent down for a home and have a minimum credit score of 580.
Qualifying is easier
It’s easier to qualify for an FHA loan than for a conventional loan. Since they’re backed by the federal government, the lender assumes less risk with the loan. That means those with a short credit history, low credit score, or little savings can make the leap into homeownership.
They can be used for different kinds of homes
You don’t need to buy a single-family residence to qualify for an FHA loan. Some condos have been approved for FHA loans and they can also be used for manufactured homes or multi-family homes. The only stipulation is that the home is used as your primary residence. So if you’re planning to buy a duplex, for example, you will need to live in one of the units to qualify. FHA loans cannot be used for properties purchased solely for investment.
Each lender sets their own standards
While FHA loans are backed by the federal government, they aren’t the ones lending the money. Instead, various lenders have been approved to offer FHA loans. That means that each lender will set its own standards when it comes to qualifying for an FHA loan. If you’re interested in an FHA loan, then it pays to shop around. Different lenders will offer different rates and terms, so be sure to do your research. It could save you money in the long run.
You can get an FHA loan for repairs and upgrades
Are you hoping to buy a fixer-upper but worried you can’t get a loan to make improvements? FHA loans can help with that, too. There are various types of FHA loans available that let you borrow money to make those repairs and renovations.
You will need to get mortgage insurance
One of the drawbacks of an FHA loan is that you will need to purchase mortgage insurance. This mortgage insurance is not canceled once you gain a certain amount of equity, as it is with a conventional loan. If you pay less than ten percent, you’ll pay mortgage insurance for the life of the loan. If you pay more than ten percent, then you’ll pay mortgage insurance for 11 years.