Many people looking for a mortgage have heard different terms being thrown around, but how many actually know exactly what they are? Take FHA loans, for instance. What are they and what does it benefit a buyer to get one?
An FHA loan is simply a loan that is guaranteed by the Federal Housing Administration, or the FHA- a division of the Department of Housing and Urban Development. The lenders making the loans have to be approved by the FHA. If a buyer defaults on one of these loans at any time, the FHA guarantees the issuing bank that they will cover it so that the bank is not left having to write off the loss. With this kind of guarantee backing it, banks are much more willing to make the loan.
Benefits of an FHA loan
The appeal to an FHA loan is not just that it is guaranteed. Another main reason why buyers like them is because they only require a small down payment. The amount required is less than 5 percent. Many people who can afford the monthly payments may not have the means to come up with a significant amount to put down on the home. FHA takes this burden out of the equation. This frees up homeownership to many more of the population.
The low down payment can also be gifted to the buyer. What does this mean? It means that a family member can give you the money to use as your down payment. The money can also come from other sources. There are certain guidelines that have to be followed so it is best to go over these with me beforehand to ensure compliance. This is especially helpful for first-time homebuyers to get them started.
Other advantages to an FHA loan is that it typically has lower closing costs than many other types of loans, such as conventional. FHA loans are also easier to qualify for than many other loans so they are open to a larger sector of the population. Since the federal government is willing to back the loan it takes much of the pressure off of the bank.
What if my credit isn’t perfect?
FHA loans are designed to take certain credit blemishes into consideration. Then know how difficult it is to keep credit ratings in perfect condition. They also know that “life” happens and things can sometimes get out of our control. That’s why FHA loans take all of the information into play and can make allowances on certain circumstances that might automatically disqualify you from other loans.