What are FHA Loans?
Loans Insured by the Government
The Federal Housing Administration (FHA) is the governing body that insures home loans provided by FHA-approved lenders. FHA Loans are designed to help low/moderate income home buyers to afford a house with a more lenient credit score requirement and lower down-payment than traditional loan requirements. Since FHA loans are secured by the US government, the lender knows they’re protected even if the borrower defaults on the loan.
FHA-Approved Lenders
Since the loan is being secured by the government, they require you to purchase the loan from an FHA-approved lender; while the Federal Housing Administration insures the loan, they are not the lender. Do your research before reaching out to a lender to ensure that you know what questions to ask and what to expect.
Other Types of FHA Loans
For individuals over the age of 62, FHA Reverse Mortgages are an option that help turn home equity into cash. There are also FHA Energy-Efficient Mortgages to help finance energy-efficient upgrades to your home, which can help to decrease utility bill costs every month (and of course, it’s environmentally friendly).
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FHA Mortgage Insurance
Anyone with a home price in the FHA Allowed Lending Limits can apply for an FHA Program Loan with these lower requirements. However, as a tradeoff you’ll have an additional payment called FHA Mortgage Insurance that will be included in your monthly payment and must be paid for at least five years, regardless of how much equity you build up during that time. After five years, if your loan-to-value ratio has reached a point below 78%, meaning you have over 22% equity in the home, then you can elect to cancel the FHA mortgage insurance and have it removed from your monthly payments.
Like a conventional loan, the interest rate and monthly payment you will receive is based on your credit and down payment amount. Since the FHA insures the loan, the government will pay the lender for any losses on the loan. That is why the borrower still pays for a part of this insurance through the mortgage insurance itself.
Different lenders will have different interest rates on FHA loans so make sure to shop around to find the best deal for you.
