• 5 Benefits of an FHA Loan

    November 24, 2014
  • Now part of the U.S. Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA) has been insuring loans since 1934 in an effort to help people become homeowners. According to their website, the “FHA is the largest insurer of residential mortgages in the world.”2


    If you’re interested in an FHA loan, you should be aware that the loan requirements can get complicated. For example, FHA loan spending limits are pre-set. The loan amounts are determined by the median prices of a home in different cities within a particular area. The difference in loan amounts between rural and densely populated areas can vary by as much as several hundred thousand dollars.


    As you start looking further into FHA loan requirements, you’ll find that it involves mortgage insurance, loan limits, closing costs, debt ratios, and credit issues. Because the process can be overwhelming, it is often beneficial to work with a mortgage company that has experience working with FHA loans and lenders so that you can get the best rates possible in your financial situation.


    Benefits of an FHA Loan


    It’s important to understand that the FHA doesn’t make loans or guarantee loans; it insures loans. Private lenders fund these loans, but the FHA insures them against default. This mortgage insurance helps remove or minimize the risk of default that lenders face when a buyer puts less than 20% down on a home purchase. Some of the benefits that this gives to home buyers include:


    1. Lower Down Payment

    Many traditional home loans often require a 5%, 10%, or even 20% down payment. With an FHA loan, you may only need to pay a 3.5% down payment. This allows you to buy a home and start building equity sooner.


    2. Better Interest Rates – Even With Credit Issues

    All FHA borrowers receive the same rate because there is no interest rate penalty for people with credit issues. If you qualify for an FHA loan, you receive the current interest rate. Simple as that. FHA loan interest rates are also very competitive, generally being within .5% of the rate a well-qualified buyer might receive on a conventional loan.


    3. More Leniency on Credit History

    Unlike conventional loans, FHA loan guidelines do not require a minimum credit score. As long as there is no negative credit history on a borrowers report, they can qualify—even with little or no credit history. This also means that you can qualify for an FHA loan in as little as two years after declaring bankruptcy and three years after a foreclosure as long as your credit since then is clean. With conventional loans, you often have to have two years of clean credit and a minimum of four years after a bankruptcy or foreclosure before you will be approved.


    4. Higher Qualifying Debt Ratios

    You can qualify for an FHA loan with a higher total monthly debt than you can for a conventional loan.

    • Housing Expense to Income Ratio: Traditionally, conventional loans allow for your new home expenses (including mortgage, taxes, insurance, homeowner’s dues, etc.) to equal no more than 28% of your monthly gross (pre-tax) income while current FHA loan guidelines allow for up to 31%.
    • Total Fixed Debt to Income Ratio: Also, conventional loans generally want your total debt-to-income ratio (including credit card bills, car loans, child support, student loans, your new home expenses, and any other debt that requires monthly payments) to be no higher than 36% of your monthly gross (pre-tax) income while current FHA loan guidelines allow for up to 43%.


    5. Lower Mortgage Insurance Rates

    The mortgage insurance fee on an FHA loan is almost always lower than the fee paid on conventional mortgages. This lower fee can result in lower overall monthly payments.


    1 http://portal.hud.gov/hudportal/HUD?src=/buying/loans

    2 http://www.fha.com/fha_loan_requirements