A FHA loan is a kind of mortgage that the Federal Housing Administration insures. These kinds of loans prove popular among many home buyers, although first-timers in particular like them since many can buy a home with a down payment of as little as 3.5 percent of the home value, provided their credit score is 580 or higher.
There are stipulations though.
Borrowers must pay premiums for mortgage insurance, which provides lenders protection should there be a borrower default.
While borrowers can qualify for many of these loans with down payments of 3.5 percent when their credit score is 580 or above, they can also qualify for some FHA loans with lower credit scores.
Those with credit ratings in the 500 – 579 range can often qualify for loans with down payments of at least 10 percent. Like many other types of loans, lower credit scores carry higher interest rates.
Why Were FHA Loans Created in the First Place?
The FHA program was a response to events of the 1930s, when there was a rash of defaults and foreclosures. So the government came up with this loan program to make it easier for Americans to afford homes. Providing mortgage lenders with sufficient insurance was another goal.
On top of that, the larger desire was the stimulation of the housing market by providing affordable and accessible loans for individuals or families with subpar credit or needing to do only a low-down payment.
In essence, the federal government insures the loans for lenders the Federal Housing and Administration approves of, so that they have reduced risk of any potential loss, should a borrower default on the mortgage payments they are responsible for.
A credit score and down payment are two primary loan requirements for this program but are far from the only ones. Mortgage insurance is critical, as are lending limits determined at state and county levels.
The FHA loan checklist must be adhered to, and there are particulars decided by region or case by case in regards to closing costs, debt to income ratio, and credit questions. A property appraisal and credit report are part of the process.
Why are FHA Loans Popular Again?
These loans weren’t used much during the housing boom. Back in 2007, only 3 percent of all loans nationally were of an FHA nature.
This type of loan program simply wasn’t attractive back then, as conventional loans were less strict about appraisal guidelines, often had lower mortgage insurance costs, and didn’t come with the loan limit restrictions.
In fact, conventional loan products might have offered options for interest-only, 100-percent financing possibilities, and low doc alternatives which were just easier.
On the other hand, the modern market has practically none of the loan products that once competed with FHA loans.
Such products are now considered to be excessively risky by many lenders, and some actually point to those products, particularly subprime products, as the root trigger behind the financial crisis that wound up destabilizing the global economy.
Now, roughly half of all American loans are FHA variants. That’s largely due to the fact that these government loans are easier in terms of qualification, while also providing lower down payment options than many conventional loans.
Something else making these loans increasingly competitive is that real estate values plummeted, but the loan limits stayed the same. So, a lot more homes now fall under the FHA financing thresholds.
They Aren’t for Everyone
For all the perks and benefits, these loans aren’t right for everyone. If someone needs a big loan, an FHA variant might not be big enough.
Also, ongoing premiums following the upfront mortgage insurance premium can prove more expensive than private mortgage insurance might be, especially as equity is built up in a home.
Shopping around is always wise when looking for loans, FHA or conventional. Use the internet to do all the preliminary research and then compare the offers of multiple sources before you take any action. Talking to a mortgage professional can help you find guidance on the specific programs that might be good choices in your circumstances.
Basically, if you are finding it difficult to qualify for a conventional mortgage because of your credit and lack of funds for a down payment, then you should give this loan type serious consideration. It was created precisely for situations like yours.
Otherwise, you’re probably better off going with the typical mortgage.