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What is an FHA Loan?


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TERMINOLOGY

Many prospective homeowners want to know, what is an FHA loan? What are the advantages over other types of loans? For many potential home buyers, an FHA loan presents you with several advantages over a traditional mortgage. The FHA is a government-backed program that attempts to give home buyers a leg up on the mortgage market. Here are a few aspects of an FHA loan.

Government Guaranteed

The most important aspect of an FHA loan is that they insure the loan against default. This means that if you cannot pay off the loan, the FHA will repay the lender. Therefore, it represents a very low risk opportunity for the lender. With this type of guarantee, mortgage lenders can provide mortgages to many people that they otherwise would not. It helps people with lower credit scores and those who do not have enough income to qualify for the mortgage that they need. It opens the door for almost anyone to own a house.

No Restrictions

Unlike many other loan programs out there, there are no restrictions on who can get an FHA loan. You still have to display a certain level of creditworthiness, but you do not have to be a part of a certain group to qualify. For example, you do not have to be a veteran in order to get an FHA loan. You simply walk into your local mortgage lender and ask to apply for an FHA loan. Most lenders work with the FHA to provide loans in every market. Therefore, the access to this type of loan is unparalleled in the industry.

Low Down Payment

Another way that FHA loans help buyers is with a reduced down payment. With this type of loan, you can realistically expect to put about 3.5 percent down on the house. With a regular loan, you might be required to put down as much as 10 to 20 percent. This can add up to a substantial amount of money and eliminate many potential buyers. If you think you do not have enough money saved up for a down payment to buy a house, an FHA loan is definitely something that you should consider.

Upfront PMI

With FHA loans, they will charge you an upfront fee to cover mortgage insurance. Their closing costs can be lumped into the loan, so you have to be careful to see what you are paying. In some cases, this fee can actually add up to more than PMI with a normal mortgage would. The upfront mortgage insurance premium usually works out to about 2.25% of the loan amount. On a $100,000 loan that works out to $2250 in mortgage insurance. 

In addition to the upfront mortgage insurance premium, you will also have to pay a monthly amount for mortgage insurance. In most cases, this is about 0.55% of the loan amount. Therefore, you have to consider your options carefully with this type of mortgage. You will save in some areas and pay more in others. Compare your options and decide if an FHA loan is right for you.