While the economy today certainly is better compared to when it was back int he Great Depression, homes are still difficult to purchase, and reports say that there has been a decline in home purchases from millennials simply because not many of this particular age group can afford homes.
Home loans are an essential tool in the purchasing of properties, and thankfully, it’s even become a lot more accessible with the Federal Housing Administration—the sub-department of the U.S. Department’s Housing and Urban Development. If you’re thinking of purchasing a home, your dreams might be more attainable with the FHA.
Here are a few things to know about an FHA mortgage:
Lower credit score and down payment standards
The FHA standards for down payments and FICO score are much lower than that of conventional mortgages. Borrowers are eligible for an FHA loan with a credit score of at least 500. A down payment of 3.5% is also allowed for borrowers whose credit score is 580 and up.
While the HUD sets those standards, it’s possible for lenders to increase the requirement still even more; so it always pays to work on your credit score, making sure it’s as high as it can be. Remember that loans with incredibly low credit scores also have her rates in general and that lending firms are afraid that if they fund too many failed loans, HUD might disqualify them from accommodating FHA-ensured loans in the future.
On the contrary, for one to make it with conventional loans, a borrower must have at least a 620 to 640 credit score—a far departure from FHA’s permitted 500.
Gift funds may also be used to cover the entire down payment of a buyer in the FHA. With conventional loans, only a portion of a borrower’s down payment is allowed.
FHA has mortgage insurance for the whole duration of the loan
Under a conventional mortgage, borrowers no longer need to maintain private mortgage insurance if they’re able to pay a 20% down. As a matter of fact, conventional loan borrowers may even eliminate their mortgage insurance once borrowers build an 80% equity on the home.
Such isn’t the case under an FHA loan, as a mortgage insurance premium (MIP) will have to be paid for until the end of the loan.
FHA Closing Costs
FHA mortgages permit sellers to cover up to 6% of the entire loan amount to help pay off the buyer’s closing costs. Compared to conventional loans, this percentage is twice the amount; conventional mortgages only allow sellers to cover 3% of closing cost expenses.
For many homebuyers, especially those purchasing a property for the first time, this can be considered such a weight off the shoulders. The most significant advantage one might see in an FHA loan is the capacity to build equity at sooner paces; whereas with a conventional mortgage, it could take longer because of higher fees.
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