FHA loans are loans by moneylenders to aspiring homeowners, who are mostly low-income earners, which are guaranteed by the FHA. Therefore, the loans are not given by the FHA, but only guaranteed. Anyway, the difference is almost the same and hence the reason they are referred to as FHA loans. It is a program by the United States government to ensure that even the low-income earners are able to secure loans to buy homes without many problems.
In essence, most banks will not approve you for any mortgage especially if you have a poor credit score. FHA acts as security to them, such that in case a borrower defaults in paying up the loan, it will come in and pay the bank or the financier of the loan fully. This offers a smooth way of acquiring a home to many, as access to the money is always the problem.
Eligibility of FHA Loans
Being a government backed program, FHA has a very minimal qualification criteria. Some of the common restrictions that other financiers would place on loans are scrapped when it comes to the FHA loans. Note however, that different lenders have different conditions for these loans. The one fundamental condition is:
Income ability to service the loan: the lenders will require you to show that indeed you have an income channel that you can use to comfortably service the loan they are about to give you. The good thing is that, there are no income limits to which one should achieve to qualify for the loan. This is the reason why most low-income earners prefer the FHA loans. Let’s take a more in-depth look at the pros and cons of FHA loans.
Pros and Cons of FHA Loans
- Low credit score approval
With the prevailing harsh economic times, it is difficult to be approved for any loan, let alone a mortgage, if you have a poor credit score. However, you can get approved for a FHA loan with a credit score as low as a 580 (while still being eligible for the 3.5% down payment), subject to the different lenders. This allows many people, regardless of their past financial record to afford owning a home.
- Lax qualification requirements
In the world today, stricter measures and restrictions are being put in place to ensure that proper validation is done before any lender agrees to give you any form of credit. The bureaucracy has made credit facilities unattractive to many people. When it comes to the FHA loans, it is different. All you need is to show that indeed you have the ability to service the loan and maintain a prescribed debt to income ratio, mostly below 60% for you to qualify.
- Small purchase down payment
With down payments as low as 3.5% of the total value of the house, you can get your home and start paying up the remaining over time. Most of the vendors require a high down payment as security that you are indeed able to pay. FHA itself acting as collateral allows you to be trusted hence, the reason why such a low down payment is accepted.
- Easily assumable
FHA loans are easily taken over by other people in case you decide to sell the house before you are done paying up the loan. The buyer therefore, takes up the loan where you have left it at the time of sale. The good thing is, the terms of the loan do not change. This allows the buyer of the house to continue enjoying the fair terms of the loan.
- Home improvement option
You’re allowed to use an FHA loan to furnish and improve your home. These are called FHA 203K loans. It is not restricted to just buying a home. This allows borrowers to better their living conditions by upgrading their homes as they please using these loans. Many lenders otherwise put restrictions on how the loan is used, and this makes FHA different and very desirable.
- Low interest rates
With FHA as your guarantor, you’re able to get a good bargain when it comes to interest rates of the loan. The loan itself is believed to be for lower income earners and therefore, getting low cost loans from lenders is one of the fundamental things.
- Loan limit
With FHA loans, there is a certain amount of loan that you cannot be approved for. Being a federal government program, it is meant to uplift the standards of people and the community especially the low-income earners and hence, only guarantees loan amounts enough to get you a basic home. With a very expensive home, then it would be best if you tried other mortgage products such as conventional or even jumbo loans.
- Loan service charge
FHA charges a cost to borrowers for acting as their guarantors. This is in addition to the normal interest rate charged by the lender. Otherwise referred to as mortgage insurance premium, this charge can be in the long run be more expensive than what you would incur if you got the loan from the lender without the help of FHA. Part of it is required to be paid upfront, which maybe a hustle for many people.
- Lender acceptability
Not all lenders are FHA friendly lenders. You will need to get a lender that is FHA approved for you to get the loan. This limits the credit sources of the borrowers.
It’s clear that FHA loans are ideal especially for first time homeowners as the access to the loans is quite relaxed. However, it is always advisable to have several options to look at before making the decision on which mortgage loan to go with. Many other options such as direct bank loans, conventional loans (see FHA vs Conventional), VA loans just to mention but a few, are all valid mortgage options which you can weigh against the FHA loans to see which suits you well. If you are planning to get a sophisticated and expensive home, then you should know that FHA might not the best option for you. Talk to your lender about the pros and cons of FHA loans before making the decision. Keep in mind that, above all else, FHA loans are debts, which need to be repaid with time, so you need to have a plan to pay-up even before signing on the dotted line.