When you’re planning to purchase a home, chances are you’ve come across the term FHA loans. However, if you are still trying to figure out what this is and if this could be helpful to you, then this article is for you. Using an FHA loan can be a great way to get ready for a home purchase.
This article will help you find out if you would qualify, if it is the best choice for you, and other important things to know about the ins and outs of an FHA loan.
First off, who is an FHA loan for? The Federal Housing Administration Loan or FHA loan, for short, is a type of mortgage guaranteed by the same agency. And since they have this guarantee from the U.S. government, lenders will approve home loans with a lower down payment.
FHA loans are ideal for first-time buyers. So, if you’re planning to check if you qualify, make sure you comply with the following requirements:
1) At least 3.5% down payment (with a credit score of 580 or higher) OR at least 10% down payment (with a credit score below 580 in some cases)
2) Meet debt-to-income ratio limits
3) The home you’re planning to purchase must be for a primary residence
4) The property must be between one and four units
Mortgage Insurance May Be Required
Lenders of FHA loans usually approve your mortgage application despite shelling out only a 3.5% down payment, but you have to get mortgage insurance in exchange. That’s only fair as they expose themselves to a larger degree of default risk than those mortgage applications that involve a 10% or 20% down payment.
Mortgage insurance is required because the insurance provider is liable to the lender if you default. Please take note that mortgage insurance is not for the buyer’s benefit, even though the buyer is the one paying the premium. The policy actually protects the lender.
This might be an added expense in the short term, but this doesn’t go on forever. When the buyer has paid the 20% equity threshold equivalent, he no longer needs to pay for mortgage insurance, and this requirement goes away. Then you can expect to pay a lower monthly payment.
To know more about how you can take advantage of FHA loans or if you would like to know more about this option, please feel free to reach out to one of our associates at TLC Lender.