Unless you happen to have a massive stash of cash lying around, you’ll probably need a mortgage to afford the home you wish to own. With the price of real estate properties these days, buying a house has become synonymous with getting a loan.
With the many different types of loans available, one would expect that qualifying for one should be fairly easy but that is not the case. The mortgage industry is a tough world to conquer especially for the average man, earning an average income. Thankfully, there are options like the FHA loan that opens more affordable homeownership opportunities for the working class.
The FHA loan is a government-backed mortgage program that works with authorized lenders in offering home loans with broader wiggle room for moderate-income households and individuals. It is an initiative of the Federal Housing Administration, which is a part of the U.S. Department of Housing and Urban Development.
What this government-insurance does is guarantee the loans issued by FHA-approved lenders under the FHA loan program to protect the originating companies against default. This security is what allows the lenders to ease up on the qualification criteria and down payment requirement of the mortgage.
The FHA loan may be used to purchase or renovate home. It is typically offered as a fixed-rate mortgage or as five-year ARMs, in 15 to 30-year terms.
The loan comes in different types:
- Traditional FHA 203b Loan
There is the standard FHA loan, a favorite of first-time homebuyers, which offers up to 96.5% financing. Applicants, who meet all the requirements including the minimum credit score of 580, only have to cover a down payment rate of 3.5%.
- FHA 203k Loan
Another type is the FHA 203k loan, which permits applicants to purchase fixer-uppers. The program funds both the purchase of the property and the necessary improvements required.
- FHA HECM
The FHA also has a guaranteed loan exclusive to borrowers aged 62 and above. The FHA HECM loan, (Home Equity Conversion Mortgage or Reverse Mortgage,) allow seniors to borrow against the equity of their home.
- Other options
There are also special FHA loan options for the purchase of manufactured and mobile homes, although these types come with a different set of financing requirement and underwriting.
The Pros and Cons of the FHA Mortgage Loan
The FHA loan is an attractive alternative for people who fail to qualify for conventional mortgages due to specific financial and credit-related reasons. Traditional loans are known to shy away from people with bumpy credit histories. The FHA mortgage, on the other hand, has more lenient terms. Borrowers who have had credit troubles in the past have a good chance of obtaining a loan as long as their credit standings continuously reflect signs of progress.
Where the FHA home mortgage loans won’t look and sound so appealing is on the insurance part of the mortgage. Due to the low-cost nature of the loan, borrowers are required to pay for both upfront and annual MIP, which may become a huge financial set back in the long run.
Indeed, the FHA loan has its upsides and downsides. That said, we recommend that you take a thorough assessment of your finances and consult with a professional before going for it.