If you are looking to buy a home, you may have already discovered that there are a ton of options to choose from. And it likely doesn’t help that there is an entire vernacular that you may not be very familiar with. One of the common acronyms you will hear thrown around is an FHA loan. It’s a loan that is insured by the Federal Housing Administration. If you are a first time homebuyer, the FHA loan may be a solid option for you in your quest for a new home.
What exactly is an FHA Loan?
The federal government insures the FHA loan, and the purpose is to reduce the risk for lenders in the event the borrower defaults on the loan. The loan was developed in response to the Great Depression when numerous homeowners faced foreclosures and defaulted on their loans. With the FHA loan, home ownership becomes more accessible for borrowers who may not have otherwise been able to qualify for a home loan.
How can it benefit me?
There are a number of benefits associated with an FHA loan. You can qualify for the loan even if you don’t have A-1 credit, and the down payments are typically lower than traditional home loans. With an FHA loan you can expect to pay 3.5 percent down whereas with traditional loans you may be expected to pay closer to 20 percent down. Additionally, with most home loans, you are required to pay private mortgage insurance or PMI when your down payment is less than 20 percent. Getting an FHA loan can be a huge benefit for borrowers who cannot get approved for PMI.
Are there any disadvantages?
It is always important to look at the advantages and disadvantages before making a decision, especially with something as substantial as buying a home. While the FHA loan is an easier loan to qualify for, the loan also has some very strict standards for borrowers to follow. For starters, there are two mortgage insurance premiums required with an FHA loan.
One premium, called the Up Front Mortgage Insurance Premium (MIP), is required up front but can also be financed into the mortgage. The other is the Annual MIP, which is actually required monthly. In addition to the double insurance premiums, there is also a loan limit set for FHA loans. Borrowers are restricted by state and county mortgage limits, which of course vary.
To learn more about the mortgage limits for FHA loans in your area visit the US Department of Housing and Urban Development info site.
If you are looking to purchase a home and you are either a first time home buyer or you have some blemishes on your credit, an FHA may be a viable option for you. Start by contacting one of our agents at 123 My New Home and we can help you apply for and save thousands with an FHA.