What is an FHA loan and how does it work?

What is an FHA loan and how does it work?

October 19, 2016
FHA loan
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While researching mortgages, you might have stumbled upon FHA loans. FHA comes from the Federal Housing Administration, a government agency that allows borrowers to take advantage of low down payments, reduced closing costs, and relaxed lending standards, all while insuring your loan, which is offered by FHA approved lenders. As you may have already guessed, an FHA loan is a mortgage insured by the Federal Housing Administration.

FHA loans have been around since 1934. Over the years, they helped tens of millions of Americans. Today, FHA loans are very popular, especially with first-time home buyers, because their requirements are less strict than those of conventional loans.

If you want to know more about FHA loans, here are some facts to help you out.

FHA loans come with low down payments

With conventional loans, you need a 20% down payment. If you pay less, then you need to get private mortgage insurance, which only benefits the lender.

However, if you get an FHA loan, you will have to pay as little as 3.5% down. You still have to pay the FHA to insure the loan, but the costs are much lower than those which come with private mortgage insurance.

It’s easier to qualify for an FHA loan

Since the federal government insures the loan, the risk to the lenders is a lot smaller. That’s why your lender will agree to give you a break if you want to get an FHA loan. This is great for first-time homebuyers or residents of disadvantaged neighborhoods, as well as borrowers with lower credit scores.

Lenders approved by the FHA can offer different loan terms

Different lenders offer different rates and terms. It’s a rule that applies to all lenders, no matter what type of loan you’re looking for. That’s why it’s important to shop around, if you want to get the best possible rates.

FHA loans feature lower interest rates

You will negotiate your rate with the FHA-approved lender. Interest rates for FHA-guaranteed loans are generally lower, although the FHA doesn’t really have anything to do with them or with how they are calculated.

An FHA loan has lower closing costs

If you have any refinancing experience, then you surely know how much trouble closing costs can cause. Fortunately, in addition to the lower rates and lower down payment, FHA loans also offer lower closing costs. But don’t forget that you still have to negotiate them with your FHA-approved lender. Shopping around can help you get lower closing costs.

Your FHA loan can help you avoid foreclosure

If you are in default on a mortgage, you can use the Making Home Affordable Program, a government initiative meant to help borrowers who are in financial distress. It will help you reduce your loan payments and avoid foreclosure.

FHA loans can also help disaster victims

Bad luck strikes when you least expect it. Earthquakes, floods, landslides or tornados can damage your home really bad. And this is where the FHA Mortgage for Disaster Victims Program comes it. It provides 100% financing through approved lenders for the purchase or reconstruction of a home severely damaged or destroyed due to a disaster.

FHA loans can also provide seniors with extra income

Senior citizens can use the FHA Home Equity Conversion Mortgage program to boost their income. HECM is the only reverse mortgage insured by the federal government. It allows seniors to tap a significant portion of their equity, while remaining in their own homes.

Thomas Hookton is a finance journalist, history buff and science fiction connoisseur. Hit him up via email.

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