Mortgages are an extremely complex financial package. It's difficult enough to understand how interest rates, repayment terms, and other factors will impact your monthly budget when you're shopping for a loan. When you factor in that there are multiple types of mortgages, it can be difficult to know if the mortgage you're getting is the right one for you.
FHA loans are a specific type of mortgage that are perfectly suited for certain borrowers. To know if the program is right for you, an understanding of the basics is required.
FHA Loans--The Basics
The FHA, or Federal Housing Administration, is a group that has facilitated homeownership since 1934. Contrary to popular belief, the FHA does not offer mortgages in any way, shape, or form. They do, however, insure mortgages for borrowers that meet specific criteria. This criteria includes:
There are other criteria as well -- and some of these criteria can be altered if you're prepared to put more money down on the purchase of the home. There are limits to the amount that you can borrow for a home under FHA programs, and you must be purchasing a home that you intend to use as your primary residence.
Why Choose FHA Loans?
People tend to choose FHA loans for a variety of reasons. The most common borrower under FHA programs is a first-time homebuyer without a lot of money to use as a down payment. Conventional loans often require 5 percent or more of the purchase price as a down payment. While the difference between 5 percent and the 3.5 percent required for an FHA loan doesn't sound like a lot, it adds up to a $6,000 difference on a home with a value of $400,000.
Another reason to choose FHA programs involves the possibility of financial hardship. Since FHA loans are insured by federal programs, borrowers have some protection if they face financial hardship. If unemployment becomes an issue, a forbearance is available for FHA loans that might not be an option under a conventional loan. For people who have just begun employment with a new company, this added security is a welcome benefit.
What Are The Drawbacks To FHA Loan Packages?
Because the rates on traditional and FHA loans are similar, it might seem silly to choose a non-FHA mortgage. However, there are some disadvantages to mortgages under this program. The biggest drawback comes in the form of private mortgage insurance.
Under a conventional mortgage, private mortgage insurance is a fee paid to the lender that protects them in the event that you default on your loan. With an FHA loan, you have to pay this premium in two forms -- an upfront cost and a monthly premium. The upfront cost is 1.75 percent of the value of your home, but this can be rolled into closing costs. No matter how much you have to put down on your home, this fee is required.
The monthly premium is factored into your payments and persists for the life of the loan. Fortunately, after you've paid enough of the mortgage off to reach an 80 percent loan to value ratio, you can refinance your FHA loan to stop these monthly payments. If you can put 20 percent down on your home, you won't have to worry about these payments -- but you also might be better suited to work with a conventional loan package at this point. You should work with your lender if this is the case.
FHA loans are a great financial package for home buyers in a number of specific financial situations. If you think that home ownership is something that's out of the question for you, it could pay off to ask your lender about an FHA loan. That way, you can take advantage of today's historically low mortgage rates and lock in your home -- even if you don't have a sizable down payment socked away in your savings account.
Share11 December 2015
I always wanted to buy my own home and after saving enough money for a down payment, I decided that it was time. Before I started looking at houses, I talked with a loan officer about financing. I wanted to know how much money I could borrow so I could look at houses in that price range. I was very happy after my meeting at the loan company and I was ready to start house hunting. My name is Jarod Spangler and I'm now a homeowner. If you have the dream of owning your own home, I think you'll find my blog of help to you. I've documented my journey of saving money, securing a loan and purchasing a house. To help you become a homeowner too, I'm offering advice and tips of things that I've learned along the way.
