The Federal Housing Administration has been around for years with several people making use of them while purchasing their houses. Though despite their popularity, some people still do not understand how they work. The FHA had backed up 17% of the home loans in 2018 and about 83% of these loans were granted to new homebuyers. Having said that, here’s a guide on the basics of FHA loans and what they have to offer.
What is an FHA loan?
The Federal Housing Authority is an insured mortgage backed up by the government, becoming the largest, most popular mortgage insurance firm in the world. Established in 1934, FHA has insured about 46 million mortgages since. However, the FHA doesn’t fund any loans, only insures mortgages offered by approved lenders. Besides, these loans have fixed rate terms of 15 and 30 years.
How will FHA loans assist you?
Since these loans are backed up by the government, FHA offers a guarantee to banks that they will be responsible for losses in case the borrower fails to repay the loan. Due to this facility, lenders can offer borrowers loans with low down payments who may not have the required income. There is no income limit with FHA loans and is available to those who fit their standard criteria. Many lenders are now FHA approved to offer these loans due to their increasing popularity and to confirm their status, you can enter their information on the Department of Housing and Urban Development tool for reassurance.
Are FHA loans suitable for you?
Though these types of loans are there to assist several kinds of borrowers, they might be more suitable for first-time homebuyers who want to fully settle. Initially, you need to make a down payment of at least 3.5% with a credit score of 580. People buying houses for the first time might be benefitted the most from FHA loans, as they do not have equities from previous homes to add in their down payment. However, it is not necessary to be a first-time house buyer to benefit from these loans.
Any house that is being purchased with the help of FHA loans has to be the owner’s main residence and not a second property, as these were originally introduced to help people with homeownership and not to make extra profit.
Difference between FHA and Conventional loans
One of the main differences is that while an FHA loan is backed up by the federal government, a conventional loan is not. Conventional loans are also typically harder to qualify for due to higher criteria, though they offer their borrowers with more concessions. Furthermore, another big difference is that FHA loans might end up becoming more expensive over time due to a lower down payment, which means a large part of the price is already financed leading to the borrower having to pay more interest during the time of the loan. A higher upfront cost of the loan will eventually lead to the borrower paying less for mortgage insurance.
FHA loan limits
Like every other, an FHA loan also has a limit as to how much one can borrow though it is adjusted according to different countries and their housing costs. In Los Angeles for instance, the loan limit for a one-unit property is about $726,525 although LA is generally high in overall expenses. Countries where costs are comparatively lower, the maximum loan limit is about $314,827.
How to apply
The process to apply for an FHA loan is almost the same as for a conventional or standard loan, the mortgage application will be verified by an underwriter who goes through the financial situations of the borrower to see if they qualify and will make a decision accordingly.
