If you have heard about an FHA loan and are not sure if it's right for you! You are at the right spot. This is the complete guide on FHA loans; find all your queries and resolution about FHA loans right here.
FHA alias Federal Housing Administration is a mortgage backed by the government federal housing administration. FHA loan pre-requisite is minimum credit score as well as down payment which is lowest as compared to other conventional loans. Additionally, the FHA mortgage is quite renowned among first-time home buyers as they don't have to pay the hefty down payment and maintain a high credit score.
Not to mention, FHA loan requirements are flexible in contrast to other mortgages i.e. 3.5% down payments and 580 or higher credit score. However, the loan is insured by the government but they are managed by third-party loan lenders. Besides this, the FHA loan is designed for people who wish to own a house, especially first-time home buyers. To add, an FHA mortgage can be employed for several houses including single-family houses, condominiums, units, and some manufactured houses.
In some cases, there is a special type of FHA loan which can be used for renovating the existing dwelling as well as the construction of a new home.
Conventional loans are not backed by the government. Plus, qualifying for traditional loans from banks and credit unions requires good credit history and score, at least a 3 percent down payment for various loan programs, and solid income proof. FHA loan is different from the conventional mortgage in numerous ways such as:
• Qualification- It is easier to qualify for an FHA loan than the traditional loans procured from banks and credit unions.
• Credit Score- The credit score requirement for FHA mortgages is less compared to conventional loans.
• Flexible- FHA loan rules are not rigid as conventional loans, especially in the case of the down payment from family members, charitable organizations, employers, and others.
• Closing Costs- Closing cost is involved in an FHA loan which is not required in a traditional loan.
• Down Payment- with an FHA loan you can pay the lower monthly down payment. An individual with a credit score of 580 can make a 3.5 percent down payment whereas an individual with a credit score of 500 -579 qualifies for an FHA loan with a 10 percent down payment.
The FHA mortgage can be obtained in two terms – 15 years and 30 years with a fixed rate of interest. The main objective of an FHA loan is to assist borrowers to obtain the money which they are unable to procure from private lenders. With that said, there is a catch! The borrower who qualifies for an FHA loan has to pay mandatory FHA mortgage insurance which is designed by the agency to safeguard the interest of the lender in case the borrower doesn't pay off the mortgage amount.
There are two types of FHA mortgage insurance premium:
#1 Annual Premium- Depending upon the FHA loan term (15 years or 30 years) from 0.45 percent to 1.05 percent, the borrower has to pay LTV (loan-to-value ratio). Additionally, the premium amount is paid monthly which is calculated by dividing by 12.
#2 Upfront Premium- Approx 1.75 percent of the total loan amount is paid as a premium by the borrower after the loan is reimbursed.
On top of that, the premium of FHA is canceled by the borrower after 11 years of premium is paid.
There are several types of FHA loans such as:
• HECM- Home Equity Conversion Mortgage aka HECM is a type of FHA loan that assists seniors above age 62 to transform home equity into cash along with keeping the home ownership. The funds can be withdrawn as monthly payments by homeowners.
• Home Improvement – FHA 203 is a type of FHA loan which can be used for certain types of home renovation and repairs.
• Energy Efficient Loan – It is the type of FHA loan that is similar to the FHA 203k loan program but the loan amount is utilized for saving on utility bills. If one upgrades the home with electrical installation such as wind or solar energy they can save a substantial amount on utility.
The maximum loan amount limit for FHA depends upon various factors such as where you live and what is the ability to pay back the mortgage. Moreover, the maximum amount also depends upon your current financial situation.
To get an FHA loan approved, the borrower will typically need to connect with an FHA-approved lender. And ensure to check the authenticity of the lender by taking the elite services of a renowned provider. Additionally, before applying for an FHA loan, you must be wary of the following steps:
• Know your budget
Before reaping the many perks offered through an FHA loan, it is pivotal for you to make the master plan well ahead. By saying this, we essentially mean that you should know how much bucks you can afford to spend on the dwelling. Do consider three factors – income, saving, and most important expenses. Plus, an online calculator can be your savior to abet in calculating monthly payments based on down payments and other crucial factors.
• Weigh different offers
It is imperative to get a preapproved loan from a myriad of lenders. This will abet in comparing varied refinance rates as well as terms ensuring you get the best deal.
• Collect Documents
Before qualifying for an FHA loan it is imperative to be ready with paperwork including driver's license, tax returns (2 years), pay stubs (recent), and asset statements (bank account details and any money held from other places)
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