FHA loans are fast becoming a popular option for home buyers, and rightly so. With their backing from the federal government they are appealing not only to the home buyer but also to the lender. Today’s lending markets are tough; good credit, significant down payments and steady employment is necessary. FHA loans make these requirements easier to be met, which is why so many home buyers are turning to them.
How FHA Loans Work
In short, FHA loans are not loans from the government, nor are they guaranteed loans. Rather, the FHA insures loans. This helps to minimize the amount of risk that is taken on by the lender when providing a loan to an individual with less than ideal circumstances. Not everyone will qualify for an FHA loan, but if you have slightly blemished credit or have less than 20 percent to put down on your home purchase, an FHA loan may be a better choice over conventional loans. Conventional loans do not have this insurance.
What are the benefits of FHA loans, then? There are many, including:
- Credit Help: Your FICO score can be lower with an FHA loan over a conventional loan. Lenders still have restrictions on how low that score can be, but FICO scores that don’t qualify for conventional loans may qualify for FHA loans.
- Foreclosure Help: If you have foreclosed on a home in the past, and have since built up your credit, conventional loans still won’t provide you with a loan, in most cases. On the other hand, FHA loans may.
- Bankruptcy’s OK: Two to three years after your bankruptcy discharge, you may qualify for an FHA loan. It’s important to have proven your credit worthiness since that time, though.
- Lower Interest Rates: Even if you don’t have any credit problems, you’ll still benefit from FHA loans through lower interest rates. Since FHA loans are insured, they are less risky to lenders and therefore lower rates are offered.
- Smaller Down Payments: With conventional loans, you may be required to put down 20 percent of your home’s purchase price. With FHA loans, you can finance up to 97 percent of your home’s selling price, which means just a 3 percent down payment is required. In some situations, you’ll be able to do a no down payment loan, too.
There are plenty of benefits to FHA loans. The fact is, these loans are more affordable for many people and they’ve helped those who would not qualify for a conventional loan to live the American dream of buying a home.