It would be in our best interests to start with the absolute basics before we get into the nitty-gritty details about FHA loans. The most fundamental and dirt-simple question that we can ask is this; “What even is an FHA loan?”
An FHA loan is a type of loan that is issued and lent solely for mortgage uses only, by the Federal Housing Administration, hence its name. Its purpose is to protect and defend the financial integrity of the lender and his respective assets if the person who is taking out the loan defaults on it.
FHA loans are easier to get than your standard and average loan, therefore making them more accessible with mortgage borrowers. The specific traits of FHA loans that attract so many people are its long term availability, far less rigorous lending standards, and its smaller down payments.
So, why do people take out FHA loans? Here is why; Lenders can offer different kinds of rates at varying price points, and this leads to more flexible requirements regarding payment dates and general qualification. With this having been said, here are three different things that you will want to keep in mind if you are thinking about taking out an FHA loan.
1. A Low Credit Is Okay!
Depending on the type of loan a borrower needs, the specific credit requirements, regarding the percentages, can vary a lot. If you want to procure for yourself an FHA loan with a down payment of 3.5%, then you will need to have at least a 580 score or higher.
People who have a low credit score, the minimum being 500 and the max for the lowest rank being 579, are required to pay at least a 10% down payment for their loan.
Borrowers with a credit score lower than 500, however, are generally not eligible to take out a loan; there is simply too much chance that they will not pay the loan back, whether by choice or not. Check out your credit rating first.
2. The Minimum Down Payment is 3.5%
As previously stated, the lowest you can go regarding your down payments is usually 3.5%. Anything less than that is purely unprofitable for the lender. You can use your own savings or even your 401k to pay for your loan, but you can also use other forms of payment as well. These have the potential to include state grants, local government down-payment programs that are aimed to assist with down payments, or even a gift from a family member.
3. Some Closing Fees May Be Covered
This is somewhat unusual to find a standard FHA loan, but it is not necessarily unheard of. The Federal Housing Association sometimes permits sellers, lenders, and builders to pay for some of the borrowers closing costs. It is an incentive for the borrower to pay off the rest of the loan in a timely and budget-friendly manner, too.
These lenders will sometimes charge an even higher rate on their interest loan if they agree to pay some of the necessary closing costs! When searching for different FHA or non-FHA loans, borrowers have the opportunity to compare different offerings and rates to figure out which loan makes the most sense to them. Loan-borrowing is a highly relative thing, and whatever works for you might not work for someone else. That’s why every single lender specifically creates the loan based off of the needs of the client, hence why you can get so many options in the mortgage industry.
Everything has cons, however, and FHA loans are no different. Watch this video just to keep a few things in mind as you shop around: