The principal goal of the Federal Housing Administration (FHA) is to protect lenders from borrower default and 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 ideal rates and with low down payment and credit rating 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 guaranteed 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 does not directly provide loans, but rather offers mortgage protection insurance in a way which allows lenders to provide financing to people who may not ordinarily qualify for a mortgage. Another important difference to note (as compared to conventional loans) is that FHA loans generally have smaller down-payment requirements and more flexible underwriting criteria. Because of this, an FHA loan can help individuals 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 conventional loan. And debtors can have greater debt-to-income ratios compared to borrowers using a conventional loan. Borrowers with good credit scores may realize that a low down payment conventional mortgage offers a 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 unique requirements and terms. Though 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 rates. That 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 rating. The government repays the lender for the borrower’s inability to finance if they had been default on payments. This also incentives a creditors ability to provide competitive interest rates and issues easier qualifications. There also are no maximum income limits, but you have to satisfy a debt-to-income ratio limit of no greater than 43 percent and establish adequate income to repay the loan principal. Just because you meet with the FHA qualifications doesn’t 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 might be taking a look at a loan that’s costlier than a conventional loan would be. If your savings for a deposit don’t reach the 20% mark generally needed for a conventional loan, research down payment assistance programs or household gifts. As an alternative, you could wait on the house purchase and grow your savings and investments.