For many potential home buyers, an FHA loan can help to make the process easier and the object of their desires more attainable. Many people hear about FHA loans, but a lot of people do not fully understand what they are or how the loans can help them. Here is what you need to know about FHA loans.
FHA loans are not loans from the government, as many people think. They are actually loans from mortgage lenders that have government insurance as a safety net. This allows the lender to extend a loan with more confidence and allows you to have an easier time obtaining a mortgage loan. To put that in perspective, typical mortgage loans are more of a risk to lenders. That's because it is their money, and there is no guarantee they will recoup it if the loan is not paid back.
Benefits of an FHA Loan
FHA loans are not just for first-time home buyers, but people looking to buy their first homes can benefit from them the most. FHA loans can certainly help to ease people into the home-buying process in a number of ways.
- Lower down payment requirements
- Lower closing costs
- Competitive interest rates
In addition, an FHA loan is far more forgiving to people in a less-than-ideal economic situation. Low credit, bankruptcies and foreclosures do not automatically disqualify someone from applying for and receiving an FHA loan.
FHA Loan Requirements
You must still meet a lender's requirements if you apply for an FHA loan. Once again, these are still loans from the lender, not the government. Therefore, you will still have to meet requirements set by the lender, not by the government. There still are a few federal requirements as well. Some of the more basic requirements of an FHA loan can include:
- US citizenship or legal permanent resident
- At least 3.5% down payment
- At least 10% down payment if credit score is below threshold
- Appropriate legal age to borrow
- Mortgage insurance
- Steady employment history
- Property appraisal from FHA-approved appraiser
There are also some income requirements, but they will vary based on your personal situation. Beyond that, lenders may have various conditions of their own.
The requirement for an appraisal is to ensure the house meets mandated quality, health and safety standards. In addition, the requirement for mortgage insurance comes in two parts. First, there is the upfront premium payment, then there are the monthly insurance payments. The upfront payment will represent 1.75% of the loan amount. You can pay it at closing or have it rolled into the mortgage.
Is FHA Right for You?
While an FHA loan can help many, the loans are not for everybody. In some cases, you may want to consider a traditional loan. It is all situational and dependent on your finances, the property you want and several other factors. Speak to an FHA-approved lender to discuss your needs and situation.