How FHA Loans Work

FHA loans are a popular option among many who are looking to buy homes in the current market because they are significantly less strict than the traditional bank loans which can be used for buying a home. With these more relaxed conditions, many who use these loans can feel as if there is less pressure and have an easier time repaying them in time. However, for those who are perhaps just now looking into their options for purchasing a home, this may be a new concept. Understanding how any loan works before signing the paperwork is important, so researching the basics of these loans is a must to anyone looking to purchase a home.

FHA loans, as previously stated, seem to be more relaxed than other home loan options. They require a smaller down payment than most options and their interest rates tend to be lower. This, of course, concerns the borrower’s credit score a great deal however. The lower the credit score, the higher the down payment and interest rate are expected to be. For those with good credit, this is still an excellent deal.

Because these terms are more relaxed, the lenders who offer these loans must take precautions against the risks that they naturally encounter with this type of arrangement. Mortgage insurance is required for this loan, which manifests in two separate payments. The first, the upfront mortgage insurance premium, can either be paid when the home is purchased through closing costs or can be combined with monthly mortgage payments. The second type that must be paid, the annual MIP, is charged on a monthly basis and figured into the regular cost of the mortgage. The numbers associated with each of these payments change depending on the dollar amount of the loan as well as the period of time allotted for repayment.

There are also many requirements which must be met in order to qualify for FHA loans. Of course, this is to protect the mortgage company from adding further risk to this type of investment. Those who are seeking to borrow must have steady employment, a valid social security number, be able to pay a minimum down payment of 3.5 percent and much more in order to qualify for one of these loans.

While there are a few more aspects of FHA loans than most people might think, the benefits available can help anyone in the search and purchase of their dream home, particularly first time buyers. Be sure to discuss these options with a professional.