Understanding FHA Loan/Credit and Mortgages

Auggie Capistrano Last Updated Mar 29, 2020 (0) comment , ,

FHA loan

In today’s day and age, it is becoming increasingly difficult to buy a house; due to the increasing inflation and decreasing money value in real terms. To understand FHA loan, credit and mortgages, A common man finds it difficult to prioritize his options with a limited salary parallel to big dreams for himself and his family.

In earlier times, bank loans were not accessible to everyone primarily due to the high interest rates associated with debt and the consequences that you would have to suffer if you fail to repay that debt. Once labeled as a ‘Defaulter’, you might not be able to obtain any type of loan with the same ease the next time around. In such scenarios, FHA loans have made life easier for hopeful home buyers.

What is FHA Loan?

FHA stands for Federal Housing Authority, which is an organization within the U.S Department of Housing and Urban Development. Thus, FHA loans are a form of mortgage that is assured by FHA. In this instance, a private lender is issuing a home loan that is government backed.

FHA loans might not be the ideal credit option for all, but it can work wonders in many circumstances. Considering the fact that buying property isn’t as easy as it was back then; FHA loans allow you to buy a property that perhaps otherwise you would not be able to qualify for. Some striking features of FHA loans are as follows:

Down Payment:

Surprisingly, FHA loans permit you to buy property with a down payment as low as 3.5%. For the most part, the other lending options lack this feature depending on credit.

Seller May Pay Closing costs:

Whatever your closing costs are, your seller can pay up to 6% of that cost. This feature isn’t evident in other kinds of loan and as a buyer, this feature provides great benediction. Often times buyers forget to account for closing costs when they are shopping the real estate market.

Worried About Penalties?

Astoundingly, there are no prepayment penalties!

Forget The Past For A New Start:

If you were a defaulter in the past, there are usually lesser chances to qualify for another loan as you are a riskier person to lend money to. Think of it this way, if you loaned a computer to your friend and never got that computer back, would you want to lend them your iPad?  Since FHA loans are backed by government support; unlike other loans, they tend to offer a helping hand towards the ones who need it the most.

How Do FHA Loans Work?

Now that you are aware of the characteristics of a FHA loan, it is important to understand its structure and how it functions as well. Basically, the lender is given special protection in case the borrower fails to repay the credit. For this benefit, the borrower is supposed to pay a certain fee to FHA. Buyers who turn towards FHA loans for buying a house pay Mortgage Insurance Premium (MIP-upfront mortgage insurance) of 1.75%. In addition, the buyer is also required to pay a minimal fee with continuing monthly installments (monthly mortgage insurance) which is part of the overall monthly mortgage payment..

So, if the borrower doesn’t succeed in repaying the loan, FHA makes use of the collected premiums to pay damages to the lending bank.

Potential Drawbacks Associated With FHA Loans

You might get astonished with the appealing features but the fact that it has certain drawbacks should not be overlooked.

  • FHA loans may not fit everybody’s situation,
  • They are not the best option if you are seeking a big loan,
  • Upfront mortgage payment and MIPs can cost more than private mortgages in many cases.
  • Unlike other loans, there aren’t many options available under FHA loans.

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