Federally-guaranteed mortgage programs are designed to serve ordinary people who do not necessarily possess perfect credit scores or earn high salaries. The Federal Housing Administration (FHA) backs home loans that give working families and individuals an opportunity to enjoy the American Dream of homeownership.
An FHA Loan makes it easier to qualify for a mortgage. Everyday people who want to stop throwing their hard-earned money away on apartment rents would be wise to consider an FHA Loan.
What is an FHA Loan?
A mortgage insured by the FHA is typically referred to as an FHA Loan. These products usually allow lower down payments than many conventional loans that do not enjoy government backing. As a result, an FHA Loan also offers people with modest credit scores access to mortgages they might otherwise not be able to secure. The wisdom behind federally-supported home loans involves increased homeownership for low-income families and those with moderate salaries.
Congress established the FHA in 1934 when the Great Depression drove the country’s housing sector into dire straits. Foreclosure rates escalated and large corporate lenders limited loan access to primarily wealthy people who could afford a 50-percent down payment. Short repayment terms also put conventional loans of the day out of reach because the monthly installments remained too high for working families.
The FHA effectively turned the tide and made the US a country of homeowners rather than renters. In 2004, the percentage of homeowners reportedly peaked at 69.2 percent and has slipped to approximately 65 percent. The good news for potential homeowners is that FHA Loans remain an invaluable resource for community members on a budget.
First-time home buyers usually gravitate toward an FHA Loan or a specific First Time Home Buyer loan to finance their primary residence. FHA Loan Requirements are fairly straightforward and lending specialists are able to help first-time home buyers find the right mortgage option for their needs.
What are FHA Loan Pros?
FHA Loan programs remain a popular pathway to homeownership and wide-reaching options exist. Before deciding to go the FHA Loan route, consider whether the pros and cons mesh with your financial situation. These rank among the primary benefits an FHA Loan can provide.
- Credit Flexibility: Qualifying for some low-interest conventional mortgages may require a FICO score of 760 or higher. And the magic number for common conventional loans hovers around 620, coupled with a steady repayment history. By contrast, people with a 580 and a good repayment history can qualify for a select FHA Loan. Those with lower scores may also gain approval.
- Reduced Down Payment: An FHA-backed mortgage provides down payment flexibility in many cases. With a credit score of 580 and other strengths, homebuyers may only have to put down 3.5 percent of the home’s value. If your score runs 500-579, the down payment could still be as low as 10 percent.
Perhaps Congress’ original goal of making the US a nation of homeowners instead of renters remains the top FHA Loan benefit. The mortgages offer so much flexibility for people of all tax brackets they can quit renting and start owning sooner.
What are FHA Loan Cons?
It’s important to understand that an FHA Loan, like other options, offers a variety of terms. Even government-insured loans may put certain safeguards in place to ensure on-time repayment. Given the program opens tremendous borrowing opportunities, the so-called “cons” are not necessarily unreasonable.
- Mortgage Insurance: When homebuyers decide to put less than a 20-percent down payment, mortgage insurance may be required. In addition, a one-time fee, called an Upfront Mortgage Insurance Premium is charged at a standard rate as determined by FHA, for this loan. It can, however; be financed into the loan so there is no out-of-pocket expense. Low down payments allow people to buy sooner in many cases, which prevents squandering money on rent. One strategy to eliminate the cost of mortgage insurance is to refinance later.
- Property Requirements: The FHA establishes minimum property thresholds for safety, structural integrity, and security. A home must meet these standards for a mortgage to gain approval. This issue can be remedied by applying for an FHA 203(k) improvement loan.
Middle- and low-income borrowers typically get good value through the FHA mortgage program. Added insurance expenses may cause the monthly expenditures to tick up higher than some conventional products. However, many conventional loan opportunities will not consider a down payment of less than 20 percent.
Alternatives to FHA Loans
Not every community member is best served by utilizing an FHA Loan. People who have the cash on hand to put down 20 percent or more may get approved for conventional loans with even lower interest rates and flexible terms. The same holds true of people with near-perfect credit scores and above-average debt-to-income ratios. These are non-FHA mortgage options worth considering as well.
- Conventional Loans: Conventional loan products are available from private lenders such as credit unions and banks. These loans are typically offered in a fixed or adjustable-rate mortgage (ARM) format. They can also be guaranteed by a private resource or government-sponsored program like Fannie Mae or Freddie Mac, and people with robust credit scores, solid debt-to-income ratios, and with resources to make a 20 percent down payment may find the Conventional Loans to be a favorable choice when selecting a mortgage.
- First-Time Home Buyer Programs: First-Time Home Buyer Programs help new home buyers by offering more flexible requirements to qualify and lower down payment obligations.
- CHFA - Connecticut Housing Financing Authority is a self-funded, quasi-public organization. They are committed to diversity and inclusion as a fundamental part of their corporate culture. Its mission is to alleviate the shortage of housing for low-to-moderate-income families and persons in this state and, when appropriate, to promote or maintain the economic development of this state through employer-assisted housing efforts.
Choosing the Best Mortgage for You and Your Partner
FHA Loans remain a popular mortgage opportunity for home buyers from every walk of life. Flexible options and specialized FHA Loan products fulfill the needs of most residents. But it’s essential to meet with a loan professional before making a final decision on which mortgage is right for your unique needs and budget.
If you are considering buying a home or getting pre-approved for a mortgage, consult with Finex Credit Union today. We are happy to help you find the perfect mortgage for the home of your dreams.