As consumers who really don’t get a mortgage but just a few times in their entire lives, the differences between mortgage programs really may not seem that big of a deal. But there is a reason why there are different mortgage types and historically they provide financing solutions based upon an individual’s personal situation. That’s where an FHA mortgage loan comes into play. The FHA mortgage was first introduced in 1934 as Congress tried to bring some sense of normalcy when financing a home. Back then, banks could require a down payment as high as 30, 40 or even 50 percent and offer short term financing for just a few years which means the borrowers would have to either pay off the entire loan when it came due or refinance all over again. The Federal Housing Administration changed all that with universal guidelines that lenders could follow, not matter where the property was located.FHA is not a mortgage lender but instead is more of an insurance company that ensures lenders should an FHA loan ever go into default. This is just one of the many reasons why mortgage companies like FHA loans. As long as the lender approved the loan using proper FHA protocol, if the loan goes bad, the lender is compensated for the loss. Borrowers pay a mortgage insurance premium that funds this insurance pool. Okay, but why choose an FHA loan?FHA loans only require a down payment of 3.5%, which makes it a popular choice for first time home buyers. VA loans don’t require a down payment at all but such loans are reserved for eligible veterans and qualified service personnel. The USDA home loan is another zero down loan but the borrowers must meet strict income limitations and the property must be located in a rural or semi-rural area. FHA loans have no such restrictions.And even though the down payment is only 3.5%, a qualified party can make that down payment for the borrowers in the form of a financial gift. A qualified party is a family member, a qualified non-profit or a housing agency. With regard to closing costs, these can also be paid for by a qualifying party. The only requirement is the borrowers must have at least $500 into the transaction.FHA loans also allow for co-borrowers to help qualify. This is especially helpful when someone’s income currently is not enough to qualify for a loan on their own but needs a little short-term help from a family member, using the additional income to help qualify. For example, a borrower will get a substantial raise in three months but in the short term the current income is not enough. FHA loans are very liberal regarding co-borrowers that won’t be living in the property.FHA loans also have very competitive rates and are not penalized due to a lower down payment. Conventional mortgages will raise interest rates considerably when the down payment is less than 20 percent in addition to a mortgage insurance policy. FHA loans also have a mortgage insurance policy but the upfront premium due at closing can be rolled into the loan amount and the monthly premium is competitive as well.If you’re in the market for a home loan and need financing that asks for a smaller down payment compared to a conventional mortgage, allows for additional outside help with closing costs and a down payment and still have a competitive mortgage rate, ask your lender about the FHA option.
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