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More often than not, homebuyers who want to lower their down payments or the interest rates on their current mortgages turn to the federal housing Administration loan, also known as the FHA Loans. The US government insures these types of loans and gives them to borrowers who may not qualify for standard housing loans. However, there are pros and cons to this type of loan, and you should think about them before you apply for an FHA loan.
What are the advantages? Are there any advantages to you in this program when compared to other mortgage loans? Hopefully, we can share some insight into the FHA loan process.
The Federal Housing Administration Loan program has two significant advantages to home buyers. First, you can get a home for a small down payment and have more flexible financing options.
The main advantages are that you can:
- Make a down payment as low as 3.5%
- Get a loan even if you have had past credit problems.
These distinct benefits of using an FHA loan could sway you towards applying for this type of loan.
Smaller Down Payment
In particular, it’s the small down payment that attracts most people to the FHA Loan program. In fact, recent surveys show that most people have applied because the downpayment is smaller and can be as low as 3.5% of the home’s purchase price. This feature makes it ideal for people who don’t have a lot of money saved up for a down payment. A situation that is often the case for many first-time home buyers.
The FHA loans have less stringent qualifications than conventional home mortgage loans. The reason for this flexibility is because the government insures these loans. People looking for a home loan and who are often turned down for conventional financing, more often than not, qualify for the FHA program.
When your credit score is low and you can’t qualify for a regular mortgage loan, you may still be eligible for a Federal Housing Administration loan.
For example, most lenders may require a credit score of about 620, whereas the FHA has a lower score requirement of about 600. These numbers are not set in stone, and it depends on credit history, the area where the home is, and the other factors.
Note: Some mortgage lenders will go down to scores of about 500 in some cases.
When refinancing, borrowers may find there are also benefits to the FHA loan. The program is streamlined so there are fewer requirements and paperwork needs associated with home refinancing. The FHA refinance program can even do a refinance without a property appraisal required in most other loan options.
FHA Loans Are Also Assumable
If you ever decide to own your FHA-financed home, the new home buyer can assume the loan. However, the buyer does need to meet all HUD requirements. The benefit here is that if the original buyer’s home loan has a lower interest rate, the new owner can assume the same rate.
As pointed out above, there are several benefits to getting an FHA loan. So it might be in your best interest to apply for this type of mortgage.
Alex Capozzolo is a partner of Henry Buys Homes, a real estate company in Jacksonville, FL. He has been writing for the real estate industry for several years. Henry is a licensed agent that operates in the Florida market.