Benefits of an FHA Loan

What Are The Advantages of an FHA Loan

Are you considering buying a home and want to know why you might want to consider an FHA loan? The Federal Housing Administration mortgage program could offer you advantages over a more traditional loan.

If you are having problems qualifying for a mortgage, the advantages of an FHA loan are clear, giving you the chance to buy a home in less than perfect circumstances. We'll take a look at the benefits of an FHA mortgage and if it is right for you.

Financial Requirements Are Less Strict

If you have a less than stellar credit score, you might struggle to find a lender to approve you. The FHA loan program, however, allows credit scores as low as 580 with a down payment of just 3.5%. One of the most significant benefits of an FHA mortgage that gets tons of people into a home is the lower down payment requirements.

If you can raise a 10% down payment, you could be approved with a credit score down to 500. However, despite these minimum scores in the FHA program, many lenders may add additional requirements.

The reason for this is because lenders understand that people with lower credit scores are more at risk of default, and this is bad for the lender. You may find that a credit score above 620 is required from most lenders.

Another excellent financial benefit of an FHA mortgage is the loose requirements of an immediate family member being able to contribute gift funds towards a down payment.

Attractive Interest Rates

Another of the benefits of an FHA loan is a lower interest rate. You will qualify for interest rates similar to borrowers of regular mortgages with a higher credit score. This will give you lower monthly payments and less to pay over the course of the loan, saving you thousands of dollars.

Transferable Mortgages

It is often possible to buy a home and assume the FHA mortgage the seller had. This could have the benefit of lower interest rates than might otherwise be on offer. The buyer will still need to meet the typical requirements for an FHA mortgage, however.

If you are selling your home, this might make it more attractive to buyers who are interested in assuming the loan. This will be most appealing to buyers when interest rates are higher. You will rarely see a transferable mortgage today with a conventional loan.

You Can Have Closing Costs Paid

With an FHA mortgage, the seller is allowed to pay the buyer's closing costs up to the value of 6% of the loan amount. The limit usually is 3% on regular mortgages. This could make a big difference to some purchasers who are struggling to find the down payment and cover the other expenses involved with buying a home.

In real estate sales, it is not uncommon at all to have a seller pay for a buyer's closing costs. In actuality, the seller is not really paying for them if the offer is increased by that amount of money. As long as the seller's net stays the same, it is a win-win for everyone involved.

Simple Refinancing Procedures

An FHA loan could be a better option for someone looking to refinance. The process is streamlined, reducing the paperwork required, and can be done without having the home appraised. Refinancing your home loan could save you a lot of money, and FHA refinancing will also save you a lot of the hassle involved in the process.

The streamlined financing is one of the more helpful advantages to an FHA mortgage.

Insurance Premiums Can Be a Downside

Not everything is great when you compare an FHA loan to traditional mortgages. One of the downsides to an FHA mortgage is the insurance premiums you'll be required to pay. You may find that you have to pay more money in mortgage insurance premiums over standard loans.

Two types of payment are required for mortgage insurance with an FHA loan. There is an upfront charge of 1.75% of the loan amount. This is expected to be paid at closing but is normally added to the finance amount instead.

There will also be an amount you need to pay annually. This will depend on the amount of down payment you were able to pay when taking out the loan. With a down payment of less than 5%, you can expect to pay 0.85% each year. Above 5% and you need to find 0.80% every year.

This is more than you might expect with standard mortgages. However, the amount required will be lower if you are taking out a 15-year FHA mortgage. In this case, if you have less than a 10% down payment, you will pay 0.70% per year. More than 10% down, and you will only pay 0.45%.

You can't request to have this charge removed like you can with a more traditional mortgage. There is the option to reliance, however, that you can do when you have more than 20% equity in the home.

Get Your Credit Score Up To Get Better Terms

When you are buying a home, one of the best things to do is work on increasing your credit score prior to purchase. By getting a better credit rating, you're almost guaranteed to get better interest rates and loan terms from lenders. Doing so can put a ton of money back into your pocket through the life of the loan.

If you don't know how to go about increasing your credit score, you may want to turn to a company like Credit Karma that can offer tips and suggestions on what will have the most significant impact on your credit. The site is free, so it won't cost you anything but your time.

Final Thoughts on The Benefits of an FHA Loan

There are some great benefits of an FHA loan if you don't have a fantastic credit score or the down payment to be approved for a mortgage. It can be a lifeline to getting your own home and should give you a better interest rate as well. This will reduce the amount you have to pay in interest and will make a positive difference to your monthly costs.

Other Valuable Active Rain Mortgage Articles

Get more helpful real estate and mortgage insights in the previously published articles at Active Rain.

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