FHA Loans are government-supported mortgage loans that are insured by the United States Federal Housing Administration (FHA).
These loans were created to help low-income borrowers and homebuyers with bad credit and poor credit scores in their efforts to buy a home.
This is why FHA loans permit a down payment that is as low as 3.5% for a credit score of 580 and above. For a borrower who is willing to make a 10% down payment, they can get the loan with a credit score range of 500 – 579.
However, it is worth mentioning that the lower the credit score of an FHA loan borrower, the higher the interest rates on the loan.
Also, FHA loan borrowers are mandated to pay mortgage insurance premiums to safeguard the fund of the lender just in case the borrower defaults.
Considering its low down payment, FHA loans are popular among many home buyers who are looking to buy their first homes.
You can learn about the key things you’ll have to consider before buying your first home here.
If you need more information about how the home buying process works, here’s a simple guide about how to buy a home.
But just before you make up your mind to opt for an FHA loan, you should take a look at the pros and cons of this type of loan in order to make an informed decision.
FHA Loans Benefits
What are the key benefits of an FHA Loan?
Low Down Payments Compared To Conventional Loans
Perhaps, this is the biggest benefit of securing an FHA loan. With a down payment that is as low as 3.5% of the entire property value, FHA loans make the home buying process absolutely easy.
Even with a credit score that is as low as 500, borrowers still stand a good chance to secure an FHA loan.
Low and moderate income earners who are having a hard time with their credit and debt are still eligible for FHA loans.
Debts Are Often Overlooked
The FHA has certain eligibility standards for obtaining their loans. But debt, foreclosure and bankruptcy aren’t part of the criteria that can stop a borrower from getting the loan.
While conventional lenders will weigh all these factors carefully and most likely show potential borrowers the exit door, the FHA loans will embrace borrowers with such qualifications and still give them the loan.
Borrowers Aren’t Always Required To Pay Closing Costs
According to the FHA loan policy, borrowers can seek for help to pay for their closing costs.
On the other hand, builders, home sellers,
Sometimes they do this to close the deal as soon as possible and also to avoid conflicts with FHA administrators.
However, when lenders choose to pay FHA loan borrowers closing costs, they have an insurance plan which is to set a higher interest on the loan to cover up for their expenses.
Based on policy, FHA lenders are allowed to request for more than 5% of the entire home costs as closing costs.
FHA Loans Can Cover Renovation Costs
Aside mortgage loans, the FHA also provide home improvement loans that are in the form of 203(k) loans.
The FHA home improvement loan is different from most conventional home repair loans.
The loan is not dependent on the estimated value of the property. Rather, it is based on the home’s value after the improvement has been completed.
As a part of the loan application, FHA improvement loan borrowers are required to provide precise home repair/improvement proposal alongside cost estimates.
Take a look at this home buyers’ guide about the various types of mortgages here.
FHA Loans: The Cons
The Cost of Insurance is High
With an FHA loan, borrowers are required to make a PMI bill upfront payment if the borrower couldn’t get any help to resolve the closing costs.
Interest Rates are High
If you opt for an FHA loan, be ready to pay higher interest rates. The high interest rates are meant to provide some level of protections for FHA mortgage lenders as mortgage insurance in comparison to conventional mortgage loans.
Mortgage Insurance Payment Over The Loan’s Lifespan
If you choose an FHA loan, you’ll be required to make monthly mortgage insurance payments for as long as the loan lasts.
This means you’re mandated to pay for insurance throughout the lifespan of the loan until it elapse.
However, with conventional mortgage loans, mortgage insurance is exempted as soon as the homeowner accrues enough liquidity on the property.
If you’re interested in an FHA loan here’s how to get started;
FHA Loans: How To Apply
Securing an FHA loan isn’t a walk in the park. But there are several different methods to get the loan. To get started, here are the essential steps you’ll have to take to successfully apply for an FHA loan:
Get a Pre-approval
The first step in ensuring a smooth ride for your FHA loan application is to get a preapproval for our mortgage loan.
Although this pre-approval isn’t mandatory for getting the loan, when you have an FHA-approved mortgage lender loan pre-approval, it makes your loan application easier and faster to process.
The guidelines are easy to adhere to. All you have to do is apply for a pre-approval status. But you are required to do so with an FHA-authorized mortgage lender.
Once you’re endorsed, you’ll receive a letter notifying you about your preapproval for a loan. The letter also indicates a general loan amount.
You can also show the preapproval letter to homeowners during house hunting. Some real estate agents wouldn’t take your home buying decision serious if you don’t have a preapproval letter.
Learn more about things you can do to get pre-approved for a mortgage here.
You have to Complete Form 1003
According to the FHA, you’re mandated to complete the Uniform Residential Loan Application also known as the Fannie Mae form 1003, after you have made a decision about the home you intend to buy.
The application requests for the precise loan you need and you’re required to fill out the address of the home too. You’re required to fill out the form the same way you would complete any mortgage loan application.
On the form, you’re expected to indicate the following:
- Income requirements
- Debt and expenses
- Employment history
- Other personal data a lender will require to evaluate a home mortgage application
Get The Property Evaluated
The FHA is concerned about the market value of whatever property you’re interested in. in fact, it can affect the FHA’s decision to backstop a mortgage loan.
So whatever FHA lender you choose will hire an expert home appraiser to look at the property both interior and exterior.
Afterward, the home inspector will provide an objective estimate of the property’s value to the lender and in turn, the lender will forward that estimate to the FHA for authorization.
If the home’s estimate is within the range of the mortgage amount asked for, the borrower will move forward to the next phase of securing an FHA loan.
However, if the home appraiser falls lower than the range of the mortgage loan requested, on behalf of the FHA, your lender may nullify the request.
Adhere To Underwriting Process
This is the stage where the mortgage lender underwriter walks in to assess your FHA loan application.
The underwriter will review your financial data including your credit scores and application for an FHA loan the same way a normal mortgage loan application is reviewed.
If your finances match the FHA requirements, you’ll have your loan approved easily. However, if there’s any problem, you should contact the FHA via a formal letter and send it back to your lender.
FHA Loans Authorization
As soon as you successfully scale the underwriting stage, your mortgage loan will be authorized and you will be on the way to becoming a homeowner.
Your lender will provide the financing you require to buy your desired property and then you can move to the next phase of the closing process where the seller will hand over the home ownership to you.