Buying a home can be an exciting time, but also one that leads to a little bit of confusion. Shopping for a mortgage means hearing all kinds of different terms, not to mention how some require a certain down payment and on and on. One mortgage alternative that you have probably seen or heard about is the FHA loan. This is basically a loan that is guaranteed by the Federal Housing Administration that allows buyers to get into a home with a lower down payment. This allows the lender the leeway to extend the loan, safe in the knowledge that they are free from financial risk. As little as 3% down is often all that is required to get an FHA approved loan.
The lending guidelines laid down in an FHA loan are far less strict than those of Fannie Mae and Freddie Mac, which makes them a much more appealing option. Not only does the seller have to assume some of the closing costs, but the buyer can also roll their portion of the closing into the total loan amount. The buyer is also able to transfer the loan to whoever decides to buy their home at a later date, without having to assume additional costs. This is a major plus and can actually help when trying to sell the home at a later date.
What many people may not be aware of is that there are actually 3 different types of FHA loan programs available: FHA 203(b) fixed-rate mortgage (15- or 30-year loans), FHA 251 adjustable-rate mortgage and FHA 2-1 buy-down loans. Buyers can also take advantage of an energy efficient program that allows them to make their home energy efficient, rolling the costs of doing so into the total loan amount. If there is a downside to the FHA loan, it’s the mortgage insurance premium. In most cases, especially in the 15 or 30-year loans, the borrower takes on 1.5% of the loan amount at closing, as well as a 0.5% renewal premium that is paid annually for the life of the loan.
One thing to keep in mind when looking for an FHA mortgage is that the interest rates can be different, which is not something that everyone may be aware of. While the government assures the loan, it is still up to the lender to set the interest rate, which means that they can differ wildly from place to place. What you will also find is that FHA loans may actually come with a higher interest rate than a traditional mortgage, but the difference is not so large that it will be a major issue for the average buyer.
Since the rate you receive is often based on your credit score, it’s always a good idea to get a copy of your credit report before you go shopping for a loan. There is always the chance that your credit rating might be lower than it should be because of errors made on your report, so make sure all your ducks are in a row before you decide on the type of mortgage you should go for.
FHA Loans can offer you:
- Lower down-payments
- Lower loan closing costs
- Easier qualification
Buying your first home?
FHA has solutions for first time home buyers with lower rates and savings on closing costs.
Looking for a fixer-upper?
FHA can help you get a fixer-uppers, qualifications might be easier and saving in costs.