What is a FHA Loan?
FHA loans have helped the United States become some of the most housed people in the world, recording over 73 million Americans as home owners. Today, FHA loans are popular. With lower down payment requirements and less stringent lending standards this loan is attractive especially with first-time home owners. In Layman’s Terms an FHA loan is a mortgage backed by the Federal Housing Administration, a government agency located in the U.S Department of Housing and Urban Development (HUD). Mortgage insurance is required for all borrowers, which protects the lender if the loan is defaulted. In the 1930’s there was a string of foreclosures and defaults. One response was the FHA program. This in turn provided mortgage lenders with insurance that was necessary to help keep the housing market stable by creating loans that were affordable and accessible. With FHA home loans being implemented more than seventy years ago they have been a major contributor to home ownership rates in the United States.
The Advantages of a FHA Loan
Generally, an FHA Loan is one of the easiest mortgage loan types to apply and qualify for. A few of the variables that make this possible include, requiring a low down payment and less-than-perfect credit. A down payment of 3.5% is required for FHA loans. For example, if you need a loan of 200,000 then the down payment would be $7,000. A traditional down payment of 20 percent is not feasible for many prospective home owners. Another Advantage is that FHA loans can be assumable under certain conditions. This means if you want to sell your house, the buyer can “assume” the loan you have. This is good news for people who have had a bankruptcy, low or bad credit, or been foreclosed in the past, because you still may be able to qualify for a FHA loan. Minimum credit scores for FHA loans depends on the type of loan. For a down payment of 3.5% the borrower usually needs a credit score of 580 or higher. Qualifying for a FHA loan with lower credit is possible, however the down payment must be at least 10 percent. For the most part people with credit scores lower than 500 are ineligible for FHA loans. There are certain circumstances that the FHA may consider credit scores under 500.
Another benefit of an FHA loan is that it allows lenders, builders, and sellers to pay some some of the borrower’s closing costs. These closing cost could include an appraisal, credit report, underwriting fee, survey fee, etc. If the lender is paying the closing costs this will come in the form of a higher interest rate. When they interest rate is higher, the lender offers the borrower a credit that can cover some or all of their closing costs.
If you need some extra cash to make repairs to the home you are buying, the FHA also has a special loan for this. This loan is called a 203K and and the advantage of this loan type is that the loan amount is based on the projected value of the house after repairs and not on the current appraisal of the property. This type of loan allows the borrower to finance up to $35,000 that could go toward painting, replacing cabinets and or fixtures.
What is a Fixed Rate Loan?
A fixed rate mortgage is simply what is sounds like. It’s a mortgage where the duration of the loan has a fixed interest rate. The length of the mortgage might be available in a various amount of time. A measurement of time is considered a term. For a fixed-rate mortgage the loan is paid-in-full when the term is complete. The monthly payment for a fixed-rate loan is inversely proportional to the term allotted. For example the more years in the term, the lower the monthly payments will be. The reason for this is: with a smaller loan term the borrower repays the lender over a smaller period of time. 30 years and 15 years are the most common loan types . A 20 year and 10 year loan are available as well.
The good news about a shorter-term loan are lower mortgage rates in comparison with longer-term loans then means less interest paid to the lender over time.
The benefits of a shorter-term loan are lower mortgage rates as compared to longer-term loans; and less mortgage interest paid to the lender over time. What many people enjoy about a fixed rate mortgage is the consistency and stability that comes along with it. From day 1 your home loan is finalized, the principal and interest portion of your payment won’t change. For many people this certainty brings a peace of mind.
Finding the Loan that is Right For You
For many people a fixed rate term loan would be an ideal option. Finding the right loan for your specific situation will depend on many different variables. What are your long-term financial goals, how about your short term goals? Can you predict foreseeable changes in your job, family, etc. Check today’s rates and compare loan pricing and get started on owning your home today.