If you’re looking to purchase a new house or even a fixer-upper, you might be wondering what an FHA loan is and whether it is suitable for you. These are the ten main factors that set this type of mortgage apart.
What is an FHA Loan?
An FHA mortgage is a government-backed loan provided by an FHA-approved lender insured by the Federal Housing Administration (FHA). FHA loans have appealing interest rates for primary residences and are designed for low to moderate-income borrowers. In contrast to traditional loans, FHA financings don’t require an extensive down payment and high credit history.
FHA loan features and requirements
- Government-insured mortgage loans
- Low-interest rates
- Only for primary residences
- Minimum 580 credit history
- Low down payment
- There are maximum mortgage limits
- Require private mortgage insurance coverage (PMI)
- The initial interest rate or down payment can be a gift
- Expenses can be repaired
- The seller can pay some closing prices
FHA vs. Conventional Loan
Most borrowers compare FHA mortgages with standard mortgages when purchasing a new house. Like traditional loans, FHA loans have advantages and disadvantages, and it depends on several factors that apply to individual borrowers. Keep reading to understand the breakdown of FHA loans vs. regular loans and find out the best home loan for you.
With FHA financing, you can secure mortgage insurance during the loan term. In the past, you could cancel it once you had 20% equity, but not any longer. You will have no mortgage insurance for a conventional loan if you pay a 20% down payment; or, once you have 20% equity, you can request the lender to repay it.
FHA loan is only applicable to your primary residences. If you intend to buy a second home, rental property, or investment property, you will need a fixed-term loan mortgage.
FHA loans provide the most lenient credit guidelines among all credit products. Borrowers can have a FICO score as low as 580. And in some cases, borrowers with a FICO rating below 580 are also eligible. With most conventional fundings, you’ll require a score of 620.
The government provides insurance for such types of loans. The objective is to help debtors that would not otherwise receive a mortgage and become house owners.
Even though there’s home mortgage insurance for the entire loan term, the monthly installments might be lower than a conventional loan. So, when comparing finance products to comprehend the residence you can afford, don’t allow the PMI to disappoint you.
FHA Loan Limitations
Depending on your location, the Federal Housing Administration will set a lending limit on your home loan. These limitations vary from state to state and from region to region, just as the price of a house can be lower or higher.
For example, buying a house in California costs more than buying a new home in Florida. Hence, if you are shopping for a new property and considering FHA mortgages, make sure the price doesn’t exceed their lending limits.
Other Important Details about FHA Loan
There are other points to take into consideration when acquiring a house with an FHA finance. Here are some of them:
Fixer-uppers can become a problem if you cannot get a specific loan called 203K. With this type of loan, you can repay the renovation costs as well as the housing costs. Also, if you did not get a 203K and looking for a house with structural problems (such as severe dry rot or poor roof), then FHA loans are not an alternative. This is because the seller needs to confirm the appraiser’s findings before closing the loan, and they may intend to sell the house as it is.
Inspections and appraisals can be critical since the government is lending its money. They want to ensure that the house is in good condition and there are no significant problems. It doesn’t demand up-to-date and modern homes, but it should be in good condition. Therefore, some home sellers opposed the FHA granted funds.
This is a huge benefit when acquiring a new residence because FHA funding is not a problem. You don’t have to worry that the inspector will find dry rot or the roof is in poor condition.
The information, as mentioned earlier, summarizes everything about FHA loans. You can now understand why the dream of owning a home can become a reality. Learn how RateChecker.com makes home buying easy for you.