The principal goal of the Federal Housing Administration (FHA) is to shield lenders from borrower default and also to improve the US housing market. By insuring home loans provided by approved lenders, the FHA makes it possible for buyers to buy homes at great rates and with low down payment and credit score requirements. Rates, closing costs and points may vary by property location, loan type and borrower credit and income characteristics. This has allowed the FHA to become the largest insurer of mortgages in the world, having insured over 34 million mortgages since being created in 1934. A FHA home loan will most likely be the best home loan option for you.
The FHA doesn’t directly provide loans, but rather provides mortgage protection insurance in a means which allows lenders to provide financing to those who may not ordinarily qualify for a mortgage. Another important difference to note (as compared to conventional loans) is that FHA loans normally have smaller down-payment requirements and more flexible underwriting criteria. Because of this, an FHA loan can help people with less-than-perfect credit and less cash on hand qualify for a mortgage or refinance. Interest rates for FHA loans are lower than with a traditional loan. And debtors can have greater debt-to-income ratios in comparison to borrowers using a traditional loan. Borrowers with good credit scores may realize that a low down payment conventional mortgage provides a much better deal than an FHA loan.
For reverse mortgages, borrower eligibility requirements apply. Despite the fact that they’re backed by the government, you still have to shop around for the best mortgage, because FHA loans are issued by private creditors with different requirements and terms. While a minimum credit score of 580 is typically needed, other borrowers may still qualify for the FHA Mortgage, but with certain exceptions such as a greater down payment / higher premiums. In this way the lenders are more likely to approve a loan for you. Lenders, such as banks and credit unions, that provide FHA loans provide financing for home purchases while requiring a lower down payment.
FHA loans are more suited to someone that can’t put down 20 percent or has an average credit score. The government repays the lender for the borrower’s inability to fund if they were default on obligations. This also incentives a creditors ability to provide competitive rates of interest and issues easier qualifications. There are no maximum income limits, but you have to meet a subtract percentage limitation of no greater than 43 percent and demonstrate adequate income to pay off the loan principal. Just because you meet with the FHA qualifications does not mean it is the best kind of loan for you.
Your FHA loan may also carry higher interest rates to compensate for the low down payment. When you add those two factors together, you could be looking at a loan that’s costlier than a traditional loan would be. If your savings for a down payment don’t reach the 20% mark generally needed for a traditional loan, look into down payment assistance programs or family gifts. As an alternative, you could wait on the home purchase and grow your savings and investments.