How FHA Loans Can Greatly Help People with Good Credit

How FHA Loans Can Greatly Help People with Good Credit

It’s a well-known fact that the housing market is highly volatile. You never know when prices rise, but you also don’t know when it dips. For this reason, competition among homebuyers is fierce. However, generally one must secure a loan first to help pay for a house. There are many types of loans available, such as FHA loans.

An FHA loan is a program from the Federal Housing Administration, which is offered by banks and mortgage companies and tailored for but not exclusively available to first-time homebuyers who don’t have enough money saved up for a down payment. Qualified applicants can get approved for an FHA loan with as little as a 3.5% down payment. However, some applicants might be required to pay up to 10% to get approved by private lenders. The FHA has different loan limits, depending on your location.

While it’s a popular loan option, not many people know how it works. For this reason, we’ll discuss the matter in this article.

More about FHA Loans

FHA loans are known as low-down-payment loans. Due to these low down payment requirements, the FHA loan is ideal for first-time homebuyers. Ideally, a borrower’s credit score should be around 500 and above to qualify for 100% financing with no down payment required. Unfortunately, it is very difficult and nearly impossible to qualify for an FHA mortgage with a lower credit score. 

FHA loans are insured by the FHA, allowing lenders to back the loans with less risk. The borrower is responsible for paying the premiums for this insurance, which is meant to protect the lender.  This means that lenders are generally more willing to offer loans to less-creditworthy individuals who otherwise wouldn’t be able to qualify.

FHA loans are divided into four categories:

Home Equity Conversion Mortgage (HECM)

A HECM is a reverse mortgage available to qualified applicants 62 years old and older.  The HECM allows seniors to cash out some of the equity in their home. The loan is pretty complex to understand and there are age restrictions on who can qualify, so it’s not the best option for everyone.

FHA 203(k) Improvement Loan

The primary purpose of this loan is to pay for home repairs, upgrades, or additions that do not add any structural changes. In this case, you receive a construction loan alongside an FHA mortgage. This loan may be right when you want to add a bathroom, replace an electrical system, or make other improvements to the house. However, you need to have the home appraised first before getting a 203(k) loan.

FHA Energy Efficient Mortgage

This is an FHA loan for energy-efficient improvements at home. It may be right when you want to replace or install better insulation or other energy-efficient appliances. It’s worth noting that this loan is not suitable for paying off and replacing an existing home mortgage, so it should be used for new homes only.

Section 245(a) Loan

This is the most popular FHA loan, especially with first-time homebuyers. This is for people who want to purchase a home that’s considered “non-conforming” because it’s in poor condition, under construction, or has some other conditions that make it ineligible for a conventional loan.

It’s also used to acquire a home that has overdue taxes or isn’t habitable. Furthermore, it can also be used to purchase a home in an area with below-average housing prices, meaning those homes are less likely to appreciate.

The Benefits of FHA Loans

If you decide to apply for an FHA loan, below are some potential advantages and features:

Lower Down Payment

An FHA loan requires a 3.5% down payment, which may be lower than the down payment amount required for other loan programs, such as a conventional mortgage loan. Having a lower down payment can reduce your upfront costs and also increase your chances of getting approved.

Low Credit Score Requirement

Because of the FHA’s lower-risk factor, an FHA loan can be used for a borrower with a credit score as low as 500—but no lower. However, it’s still good to have a higher credit score to get better rates and terms. 

Mortgage Insurance

If you get an FHA loan, you’ll be required to get mortgage insurance from the FHA, which costs homeowners 0.5% of the loan amount annually. This is to cover any deficits that result from homeowners who default on their loans.

Is It for You?

The choice of getting an FHA loan ultimately depends on your situation. If you have a weak credit history, it may be the right loan for you. If you are a first-time homebuyer and do not have significant savings for a down payment this may also be a good loan program for you.

However, if you can afford to save up for a down payment, it may be best to opt for a conventional loan.

Conclusion

An FHA loan may be an excellent option for first-time homebuyers with weak credit or those without substantial down payment funds saved. 

If you’re looking for commercial mortgage brokers in NYC, Hartford Funding, LTD. may be able to help you! Our mortgage loan officers know that the home buying process can be complicated, so we provide comprehensive solutions to get you one step closer to your dream home, coupled with competitive rates and terms. Reach out today and allow us to help you!

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