This week we are focusing on a little finance -- always a great way to spend some time! The FHA loan is quite popular in our local market, and since it is government-insured, it often seems confusing for many buyers, so we're going to break it down today. It's a great option for many buyers which is why we need learn a little more about this type of home loan. And remember, like other home loans, it has its pros and cons.
The FHA loan -- FHA meaning the Federal Housing Administration -- is actually the largest insurer of residential loans in the world. The Federal Housing Administration has been around since 1934 and has insured tens of millions of loans in the decades since in the United States and its territories. As a division of the U.S. government's Department of Housing and Urban Development, the FHA doesn't actually lend the money to borrowers. Its purpose is to insure the loans issued by approved banks. As a home buyer, your financing is still being provided by your local bank, but the FHA loan gives that bank extra insurance in the form of mortgage insurance, which ultimately is paid for by the borrower over the life of the loan.
This extra insurance from the FHA allows banks to lend to borrowers with less stringent guidelines to qualify for financing, and FHA loans often have attractively low interest rates as well. Initially, the purpose of the FHA loan was to provide a way for low-income and first-time buyers to purchase a home they couldn't otherwise afford with traditional financing. As long as borrowers met the qualifying requirements of employability, job stability, and reliability, they could get an FHA loan to purchase their home.
In today's market, there are more specific guidelines to qualify for FHA financing. Current requirements cover items like mortgage lending limits, debt-to-income ratios, and even closing costs for a particular property. The FHA determines the amount the buyer qualifies for because it reduces the risk for lenders who issue the loan, a very real concern for many banks who have dealt with borrowers defaulting on their payments over the past 5-7 years. If you are interested in pursuing FHA financing, be prepared to provide a hefty amount of financial and employment records that will be used to determine the loan terms. Additionally, FHA loans only cover single family and multi-family units up to 4, so borrowers would need a special loan to purchase a condo or apartment housing more than 4 units. Of course, in our market those are a bit more rare and specialized type of purchase, so you would just want to get additional guidance from your lender.
While there are some extra tasks associated with applying for an FHA loan, if you qualify, it could very well be worth your effort. For borrowers with great credit, you can get a mortgage with a down payment of as little as 3.5% of the purchase price, and the down payment funds can even be a gift from an approved source. This is a huge benefit for buyers who may not have a five-figure nest egg to put down on a house. Another attractive feature of the FHA loan is that it provides some avenues of relief for borrowers who experience a major financial trauma and suddenly have problems paying their monthly mortgage. Should that situation arise, homeowners need to get in touch with their loan officer immediately to work out the details.
Current FHA rates with Excellent credit score according to Lending Tree:
30 year fixed: 3.875%
15 year fixed: 3.375
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