Curious About The FHA Loan? - Oh Hey, It's Ray

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Have you ever wondered what an “FHA Loan was? That’s okay; we did too. Here’s what you need to know about this affordable home loan option.

What is an FHA Loan?

An FHA loan is a mortgage loan insured by the Federal Housing Administration (FHA for short).

This type of loan was initially designed for low-to-moderate-income borrowers and is a popular option for first-time home buyers.

In fact, the FHA was initially created in 1934 by congress to help stimulate the housing market and make homeownership more accessible to Americans. This was especially important in the years after the Great Depression and World War II.

It’s important to note that this type of loan has no cap on earned income. So even though the program was designed for low-to-moderate income borrowers, just about anyone can apply—even wealthier people. (If they wanted.)

Pros of FHA Loans

One of the critical advantages of an FHA loan is that it requires a lower down payment than most traditional mortgages. For most FHA loans, the minimum down payment is 3.5% of the purchase price.

This can make it a lot easier for first-time home buyers to afford a home because—as is often the case—they may not have a lot of cash saved up for a down payment.

Additionally, the FHA allows the down payment to be made with a gift from a family member or a grant from a government program. Though, it’s essential to know that your lender will require you to document monetary gifts with a signed letter by the gift-giver.

Another advantage of an FHA loan is that the credit requirements are more lenient than those of a conventional mortgage. The FHA will consider borrowers with lower credit scores and a higher debt-to-income ratio than a traditional mortgage lender. This can make it easier for people with less-than-perfect credit to qualify for a loan.

FHA loans also have more flexible income requirements than conventional loans. Self-employed borrowers and those with multiple income streams can often qualify for an FHA loan. Though, as usual, sufficient documentation is required.

Types of FHA Loans

The FHA also offers a variety of loan options to meet the needs of different borrowers. Some of the most popular FHA loan options include:

The FHA 203(b) loan: This is the most common type of FHA loan and is used to finance a single-family home.
The FHA 203(k) loan: This loan is used to finance the purchase and renovation of a home. It allows borrowers to include the cost of repairs and renovations in the loan amount. (There are strict rules and timelines when you use a 203(k) loan. Make sure to speak with a mortgage professional to fully understand the terms of this loan.)
The FHA Reverse Mortgage: This loan is available to homeowners 62 years or older and allows them to convert a portion of their home equity into cash. (A reverse mortgage isn’t really a mortgage. It’s a way for senior citizens to cash out equity without selling their homes. There are downsides to this program, so please consult a qualified financial advisor before making a decision.)
The FHA Title I loan: This loan is for homeowners who need to make repairs or improvements to their homes but do not have enough equity to qualify for a traditional home equity loan or line of credit.

Cons of FHA Loans

One of the most polarizing aspects of an FHA loan is the mortgage insurance premium (MIP). Some people like it, and some people don’t.

The MIP is a fee added to the mortgage payment and is used to insure the loan against default. The MIP is required for all FHA loans and is typically less expensive than private mortgage insurance (PMI) required by conventional loans.

Unlike PMI, MIP on an FHA loan is usually permanent. The only option to remove it would be to refinance with a different type of loan.

However, there are also some more downsides to an FHA loan. One of the most significant drawbacks is that the loan limits are lower than those of a conventional loan. This means that borrowers may not be able to borrow as much as they would with a conventional loan. Additionally, the FHA loan process can be more time-consuming and complex than the process for a conventional loan. That may mean more documentation and paperwork.

Another disadvantage is that the FHA has a more restrictive list of approved properties. The FHA will only approve loans for properties that meet particular safety and soundness standards. This can make it more difficult to find a home that meets the FHA’s requirements, especially in older or more rural areas.

Summing It Up

To summarize, FHA loans are a popular option for first-time home buyers and those with lower credit scores. They offer lower down payment requirements, more lenient credit requirements, and various loan options. However, there are also some downsides to an FHA loan—including lower loan limits and more restrictive property requirements. Before deciding on an FHA loan, it’s crucial to weigh the pros and cons and consider contacting an experienced real estate professional that specializes in working with FHA loans.

This article was originally published on OhHeyItsRay.com

Oh Hey, It’s Ray is a real estate investor, entrepreneur, and former real estate agent. She lives happily with her husband and two children in the Pacific Northwest. See more from Ray at her YouTube channel and on Ohheyitsray.com