If you have considered buying a home lately, you have probably heard about FHA loans. If you are not a first time home buyer, you probably know all about FHA loans and how they work, but if you are a first time buyer you may not know all of the facts. Simply put, an FHA home loan is a mortgage that is insured by the Federal Housing Administration. Borrowers are required to pay mortgage insurance on every FHA loan, and it is this insurance that offers FHA lenders protection in case the homeowner defaults on the loan.
FHA v. Conventional Mortgage
So, now that you know what an FHA loan is, you might be wondering why people choose them over a conventional mortgage. Many people prefer FHA loans over conventional mortgages simply because of the lower interest rates. FHA loans are also easier to qualify for as the requirements are not as strict as they are in conventional loans. The flexibility is something that first time home buyers enjoy, as it makes the home buying process a little easier.
If you are considering an FHA loan here are some additional facts to ponder.
#1 Credit History
While good credit can certainly help with an FHA loan, you don’t have to have perfect credit to qualify. Credit score requirements are going to vary based on the type of FHA loan you are applying for, plus FHA loans don’t just look at recent and past issues, they take into consideration your entire credit history. Credit score will impact how much of a down payment is needed. If you have a credit score that is lower than 500 you probably will not qualify for an FHA loan.
#2 Down Payment
The minimum down payment for an FHA loan is 3.5 percent of the purchase price. To qualify for a down payment this low, though, you will need to have a credit score of 580 or above. Home buyers with credit scores between 500 and 580 will need to put 10 percent down. With an FHA loan you can use your own savings for the down payment, a local government down payment assistant program, or a gift from family or friends.
#3 Mortgage Insurance
All FHA loans require two mortgage insurance premiums. The first premium is paid upfront and totals 1.75 percent of the entire loan amount. It can be financed into the loan. The second premium is an annual premium, but is paid every month with your monthly mortgage payment, usually through your escrow account. How much you must pay each month will depend on the amount and length of the loan and how much you owe on your home compared to how much it is worth.
For any questions on homeownership or FHA loans, please feel free to contact us.