FHA home loans are a popular choice among homebuyers since the credit requirements are relatively more flexible, and borrowers can put down a lower down payment, compared to what would be required for a conventional home loan. Here’s what you need to know about the Federal Housing Administration (FHA) home loans.
What are FHA Home Loans?
FHA mortgages are offered by private lenders that are government-approved. These loans are insured by the FHA. Typically, to be eligible for an FHA mortgage, prospective buyers need to make a down payment of at least 3.5% of the purchase price of the house.
Things to Know About FHA Loans
Relaxed credit score requirements: Unlike traditional loans, credit score requirements for FHA loans are not as rigid. The exact requirement, however, will vary based on various factors like the equity that the homeowner has in the house. You may also find that lenders often have their credit score requirements in place over the FHA’s rules.
Mortgage insurance may be required: Prospective home buyers that don’t make a down payment of at least 20% of the home’s purchase price will be required to get mortgage insurance. Mortgage insurance financially protects the lender if the borrower defaults on the repayments. Borrowers will need to pay a monthly insurance premium and an upfront premium of 1.75% of the borrowed loan amount.
Refinancing offers for homeowners: In addition to offering mortgage to prospective homebuyers, FHA programs offer refinancing to homeowners at low mortgage rates, even if the homeowner has a low credit score, little equity in the home, or a moderate income. Thus, borrowers can opt for an FHA home improvement loan for renovations and seniors can cash out the equity in their homes using FHA’s reverse mortgage option.
While FHA loans are a great option for homebuyers, keep in mind that there may be certain property limitations with this type of loan. Further, although the credit score requirements are comparatively more relaxed, you will need to meet a certain minimum credit score to qualify. Further, you’ll also need to prove your repayment ability to the lender. You may find that certain sellers may also be hesitant to sell homes to those who opt for FHA loans due to the additional requirements that are put in place for these loans by lending institutions.
