7 Things You Should Know About FHA Loans

7 Things You Should Know About FHA Loans

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Are you looking for a home loan and you’re not sure where to start because of low cash flow or financial hardship? If your average mortgage lender is just not looking like a possibility, the U.S. government offers its own option that has been helping people get into homes since 1934. One of the main reasons people either wait to buy or flat-out don’t buy at all is because of the daunting down-payment amount. Some people feel the payment may be too big to save up for and continue to rent even though recent numbers have proven that buying a home is cheaper in the long run than renting.

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The Federal Housing Administration (FHA) pre-approves lenders that in turn offer mortgage loans that typically have low down payments, low closeout prices, and are insured by the FHA in case of default. If you are considering FHA-insured loans for buying your next home, there are some basic guidelines you should consider before jumping right in:

#1. First off, the FHA is NOT a lender itself–it simply insures loans that are given through lenders it approves to provide FHA-type loans; mortgage rates and interest may differ between lenders, so shop around for the best option

#2. While these loans are ideal for people with bad credit, people with credit scores lower than 500 are typically not eligible; however, special arrangements can be made for people with “non-traditional credit history or insufficient credit” and each state has its own lending limits

#3. FHA insurance can provide people who are facing extreme financial hardship and struggling to make payments relief options such as temporary forbearance, lower interests than already stipulated, extensions or payback periods, and a partial deferral of the loan with no interest

#4. Minimum down payments for credit scores of 580 or higher = 3.5% of home value; credit scores of 500-579 = 10% of home value

#5. FHA loans carry two mandatory insurance premiums in addition to normal mortgage payments, here are some notes:

      1. Upfront premiums that are 1.75% of the total loan amount
      2. Annual premiums that are paid monthly and are based on the amount borrowed, length of the payback period, and the loan-to-value ratio (LTV)
      3. Annual premiums usually consist of the following guidelines:
      • 3a. 15-year loan, down payment (or equity) of less than 10%: 0.7%
      • 3b. 15-year loan, down payment (or equity) of 10% or more: 0.45%
      • 3c. 30-year loan, down payment (or equity) of less than 5%: 1.35%
      • 3d. 30-year loan, down payment (or equity) of 5% or more: 1.3%

#6. Closing costs (GFE) are usually low in contrast to normal lenders, but through FHA these costs can also be covered by sellers, builders, and lenders in order to incentify borrowers to purchase homes

#7. The FHA provides 203(k) loans, an additional option for people looking to make non-structural repairs (painting, replacing fixtures, etc.) to their home up to $35,000; these additional loans are based on the proposed value of the home after the repairs are made instead of the current value

Are you enticed to pursue an FHA-approved loan yet? It is a very good option for Rent-to-Own tenants who may also still be repairing their credit and would love a low down payment option than your average lender and and further increases your chances of being approved when your lease period is up. Have your own thoughts on FHA loans? Let us know on our Facebook page!