What is an FHA Loan?

FHA (Federal Housing Association) loans are insured by the Federal Housing Administration, are available to a number of people, including first time homebuyers.

Down Payments

They are appealing because they offer low down payments (as little as 3.5 percent) and low closing costs. In some cases, you might be required to pay a 10 percent down payment. This is still much lower than the typical 20 percent down payment, and the interest rate for these loans is often quite low.

What about my Credit?

These loans are also open to people who have less than perfect credit. In general, you want to have a credit score of at least 580 or better. This is a subprime credit score, and you may still be able to receive an FHA loan with an even lower credit score (down to 500). Anyone with a score between 500 and 580 will be subjected to a higher down payment (10 percent). FHA loan providers will also look at your debt to income ratio. If you have too much debt and too little income, you may not be eligible to receive an FHA loan. They will consider what your new mortgage payment would be and how that would impact your current debt to income ratio, so it’s not just your current debt load that they are considering.

Mortgage Insurance

This type of loan is usually subject to mortgage insurance since you are not making a large down payment. While you do have to pay a little extra each month, you often receive a lower interest rate in return as lenders feel more comfortable when mortgage insurance is in place. With some types of FHA loans, you will pay mortgage insurance throughout the life of the loan. With others you will only pay mortgage insurance for the first 11 years of your loan.

Drawbacks to an FHA Loan

The drawback to this type of loan is that not everyone is eligible, and these loans cannot be used for all situations. Primarily, they can be used to purchase primary residences of a modest value. This type of loan cannot be used for rental or investment property, and you will typically be required to live in this property. These loans also have limits when it comes to the maximum amount you can borrow, and the exact limit will vary from place to place.

This doesn’t mean that you shouldn’t apply, however, because you never know. It never hurts to talk to a lender and see what your options are. Different lenders often have different requirements.

Click here to learn more about FHA loans.

What about You?

Do you have an FHA loan or another special type of loan? Tell us about it!


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