An FHA loan is a loan insured against default by the Federal Housing Administration. In other words, the FHA guarantees that a lender won’t have to write off a loan if the borrower defaults—the FHA will pay. Because of this guarantee, lenders are willing to make large mortgage loans. In fact, it is the largest insurer of residential mortgages in the world, insuring tens of millions of properties since 1934 when it was created. Nevertheless, they are a great help to some borrowers.
FHA loans are more popular than ever and may be right for you, whether you are looking to buy your first home, next home, or refinance a home you already own. To help you along, here are the top 10 facts about FHA loans:
- Low Down Payment – FHA loans allow people to buy a home with a down payment as small as 3.5%. Other loans might not allow such a low down payment.
- Competitive Fixed Rates – Interest rates of FHA loans are very attractive and competitive when compared to other loans. Also, the rates are fixed, therefore eliminating the risk of increased payments down the road.
- Flexible – Credit approval guidelines for FHA loans are more relaxed than other loans, allowing more families to secure the financing they need for their home. Some leeway is allowed, even for borrowers who’ve filed for bankruptcy.
- No Qualifying Income Limits – FHA lending limits vary based on a variety of housing types and the state and county in which the property is located.
- Debt-to-Income – The debt-to-income qualifying ratio allows a larger portion of the buyer’s income to go toward monthly mortgage payments.
- Assistance is Acceptable – When setting up your FHA loan, gift funds and down payment assistance are programs allowed. Seller contributions of up to 6% are also allowed.
- Non-occupant co-borrowers are allowed on 1-unit properties.
- Lifestyle Options – FHA loans are available on 1-4 unit properties, manufactured homes and FHA-approved condominium projects, allowing a range of lifestyle options for buyers.
- Renovation Programs – The FHA has a special loan product for borrowers who need extra cash to make repairs to their homes. The chief advantage of this type of loan, called a 203(k), is that the loan amount is based not on the current appraised value of the home, but on the projected value after the repairs are completed. A so-called “streamlined” 203(k) allows the borrower to finance up to $35,000 in nonstructural repairs, such as painting and replacing cabinets or fixtures.
- No Prepayment Penalty