The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development, provides mortgage insurance to lenders to protect them from a borrower who defaults on the loan. With FHA loans, potential home buyers who have a credit score of at least 580, take the advantage of paying the minimum down payment of 3.5%. This makes FHA loans more accessible and affordable than other mortgages. FHA loans are a great option for home buyers who don’t have a significant amount of cash for a down payment or who may have a lower credit score.
The FHA loan is the most popular government-backed home loan in the country. These low down-payment loans are made by qualified lenders and guaranteed by the Federal Housing Administration (FHA).
An FHA mortgage insurance premium (MIP) is an additional fee you pay to protect the lender’s monetary interests in case you default on your FHA loan. FHA borrowers are required to pay two mortgage insurance premiums: one upfront at closing, and another annually for as long as you repay the loan, in most cases. Remember though, when paying at least 20 percent down payment, this requirement can often be avoided altogether.
Before searching for a home and mortgage, first think about how much you can afford to put toward your down payment and monthly payments. As an example, let us say you are purchasing a home at the average national sale price ($383,000 in Q1 2021), with the standard down payment for a conventional loan (20%), average 30-year fixed-rate mortgage (3.13% in April 2021) and 5% closing costs (these vary from 2-6%). In this scenario, you would be looking at an upfront payment of $92,000 plus monthly payments of $1,313.
The simplest way of figuring out how much you can afford is to take your monthly household income and subtract your household monthly expenses. If you currently rent, keep in mind that the monthly payments on your mortgage will replace your rent payments. Still, you may also be subject to other new expenses such as homeowners’ insurance, home maintenance costs, property taxes, and private mortgage insurance (usually required if you make a down payment below 20%).
FHA Loans are popular among homebuyers wanting a low down-payment. You may be able to get FHA financing with as little as 3.5% down.
FHA Loans do not require perfect credit to secure financing. In some instances, you may qualify for 3.5% down with a 580-credit score.
FHA homebuyers with credit scores of 680 can often qualify for the same interest rate as conventional borrowers with a score of 740.
FHA loans allow sellers to pay up to 6% of the loan amount to cover buyers’ closing costs. Sellers can only pay up to 3% on conventional loans.
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