The lower down payments and more lenient lending standards make FHA loans one of the more popular options for mortgage borrowers. An FHA loan is a mortgage loan insured by the FHA also known as, the Federal Housing Administration. Borrowers who choose this option are required to pay for mortgage insurance, which protects the lender in the event the borrower defaults on the loan.
Why borrowers prefer FHA loans
The insurance, borrowers are required to pay is one of the main reasons people choose and prefer a FHA loan over other loan options. Lenders are able to offer these FHA loans at a significantly lower interest rate as well as be more lenient and flexible with their qualification requirements, which makes the FHA loan a favored option for borrowers.
Majority of lenders have a minimum credit score requirement which a borrower much meet or exceed before they are qualified to utilize the FHA loan. The down payment amount a borrower may have to pay depends on the borrower’s credit score. For example, a borrower with a credit score of 580 or higher may be qualified for a down payment as low as 3.5%. A borrower with a lower credit score than 580 may have to put down at least 10%. It’s helpful to know your credit score beforehand, but your lender can always help you obtain your score. For borrower’s who have a score lower than 500 are usually ineligible for a FHA loan, however there are steps you can take to increase your credit score.
While there are very few mortgage loans that don’t require a down payment, one of the favored reasons borrowers do choose the FHA loan over other loan options is the low down payment, at only 3.5% of the purchase price. Of course as stated above, that is if you meet the minimum qualifying credit score.
One of the many benefits of the FHA loan is borrowers can have their closing costs covered by the seller, builder or even the lender. When the lender agrees to pay the closing costs they will usually charge a higher interest rate. However, borrowers can always compare loan estimates from competitor lenders to find the lender and options that work best for them.
FHA Approved Lenders
The FHA is a home loan program it is not a lender but more of an insurer, which means to utilize it your lender must be a FHA approved lender. Make sure to do plenty of research and compare lenders because not every FHA lender offers the same interests rates.
The FHA offers a special loan program for borrowers who may need a little extra money for repairs to their new home. This special loan program is called a 203(k), utilizing this program allows borrowers to finance up to $35,000.00 for nonstructural repairs. For example, replacing fixtures, remodeling cabinets or even painting. The 203(k) loan amount is based on the projected value rather than the appraised value. Meaning, the loan is based off how much the house will be worth after repairs and such are completed. This program is great for a home that may seem a little out of date and just needs a few upgrades.