Discover if FHA Loans are correct for your family

The principal objective of the Federal Housing Administration (FHA) is to protect lenders from borrower default and to improve the US housing market. By insuring home loans provided by approved lenders, the FHA makes it possible for buyers to purchase homes at ideal rates and with low down payment and credit rating requirements. Rates, closing costs and points may vary by property location, loan type and borrower credit and income characteristics. This has allowed the FHA to become the largest insurer of mortgages on earth, having guaranteed over 34 million mortgages since being created in 1934. A FHA home loan will most likely be the best home loan option for you.

The FHA doesn’t directly provide loans, but rather offers mortgage protection insurance in a way which allows lenders to offer financing to people who may not ordinarily be eligible for a mortgage. Another important difference to note (as compared to conventional loans) is that FHA loans normally have smaller down-payment requirements and more flexible underwriting criteria. Because of this, an FHA loan may help people with less-than-perfect credit and less cash on hand qualify for a mortgage or refinance. Interest rates for FHA loans are lower than with a conventional loan. And borrowers can have higher debt-to-income ratios compared to borrowers using a conventional loan. Borrowers with good credit ratings might realize that a low down payment conventional mortgage offers a much better deal than an FHA loan.

For reverse mortgages, borrower eligibility requirements apply. Even though they’re backed by the government, you still have to shop around for the best mortgage, because FHA loans are issued by private creditors with unique requirements and terms. While a minimum credit score of 580 is typically needed, other borrowers may still qualify for an FHA Mortgage, but with certain exceptions such as a higher down payment / higher rates. That way, the lenders are more inclined to approve a loan for you. Lenders, such as banks and credit unions, that provide FHA loans provide funding for home purchases while requiring a lower down payment.

FHA loans are more suited for someone that cannot put down 20 percent or has an average credit rating. The government repays the lender for the borrower’s inability to fund if they had been default on obligations. This also incentives a creditors ability to provide competitive interest rates and issues easier qualifications. There also are no maximum income limits, but you must satisfy a subtract percentage limitation of no greater than 43 percent and establish adequate income to pay off the loan principal. Just because you meet with the FHA qualifications does not mean it is the best kind of loan for you.

Your FHA loan may also carry higher interest rates to make up for the low down payment. When you add those two factors together, you might be looking at a loan that’s more expensive than a conventional loan would be. If your savings for a down payment don’t reach the 20% mark usually needed for a conventional loan, look into down payment assistance programs or household gifts. As an alternative, you could wait on the house purchase and build up your savings and investments.