FHA loans are government-insured loans backed by the Federal Housing Authority. Government covers losses from foreclose but the loans are from private lenders funding the loans. Government insures the loans against default. Minimum credit scores and reserve are sometimes required to make sure the FHA loans meet the standards set by the Government. This ensures that the homeowner seeking a FHA mortgage gets the best loan, at an affordable rates.
As Low as 3.5% Down Payment : Lower Down Payment
- FHA loans, along with other government loans such as
- VA loans for military service members and
- veterans, and
USDA rural loans, require the lowest down payments to qualify for the loan.
Traditional loans require a minimum of between 5 and 10 percent down, while FHA requires as little as 3 percent down. Low down payments allow consumers to qualify for homes to purchase sooner.
Lower Mortgage Insurance Lower Monthly Mortgage Payments
Due to the fact that FHA loans are backed by the Government, monthly mortgage insurance fee paid on FHA loans are lower than other mortgages, such as conventional mortgage. Therefore the monthly payments are lower — FHA home loans are great for all consumers to qualify for and get them over other types of loans.
FHA Loans Have Better Interest Rates
FHA loans offer the same interest rate for all borrowers, so there is no interest rate penalty for those who have credit issues. If you qualify for the loan, you get the current rate. FHA loan rates are generally very competitive, typically within a .05 percent of conventional rates charged to the well-qualified borrower. These loans gives credit-challenged buyers the ability to qualify at rates they could not get on conventional mortgages, once the conventional rate is adjusted upward for risk.
FHA Loans You can Have Higher Debt Ratios
You can qualify with a higher total monthly debt for an FHA loan than you can for a conventional loan. Conventional loans allow for a new house payment of 28 percent of your monthly gross, or pre-tax, income, while FHA loans allow 29 percent, according to the FHA and Lending Tree. Your total monthly debt, including car payments, credit card minimums and installment loans must stay under 36 percent of your monthly income for a conventional loan, while FHA loan guidelines allow up to 41 percent, which allows more people to qualify. These ratios are current as of July 2010.
Don’t Have a Great Credit History : FHA Liberal Credit History
FHA loan guidelines do not require a minimum credit score. Borrowers can be approved with little or no credit history, as long as there is no negative credit history on their report. For those that have credit, you need only one year of clean credit history. You can qualify for an FHA mortgage in as little as two years after a bankruptcy and three years after a foreclosure, as long as there is clean credit within that time frame. Conventional loan guidelines require two years of clean credit and a minimum of four years after a bankruptcy or foreclosure.
FHA Loans have Higher Seller Contributions
There is a higher allowable seller contribution on FHA loans than there is on many conventional loans–6 percent as opposed to 3 percent. This means that you can negotiate for the seller to pay most, if not all, closing costs, which minimizes your out-of-pocket expenses. You may even ask the seller to buy down the interest rate for your loan, which allows you to pay a percentage of the loan amount upfront to “buy down” the interest rate to a lower rate.