Many people assume FHA loans are expensive because of the mortgage insurance premium they charge on their loans. But they are not all that bad and if paying MIP means you are able to get a loan, it is worth it, right? The FHA has many more flexible guidelines than standard conventional loans. These flexible guidelines are put into place because of the guarantee the FHA provides lenders which are possible because of the mortgage insurance premium you pay each month. The FHA guarantees to back up the loan should you default on it. This makes it easier for lenders to take higher risks because they know they will not be stuck with the loan if you do not pay on it. As long as you do not take a mortgage amount that will put you in over your head, those mortgage insurance premiums are not the end of the world. In the future, if you are in a better financial position, you can refinance out of the FHA loan and into a conventional loan with no PMI if you are below 80 percent LTV.
Little Money Needed for FHA Loans
Perhaps one of the greatest benefits, especially for those just starting out is the need for very little money to close on an FHA loan. With just 3.5 percent to put down on the home and low closing costs, you do not have a lot you have to bring to the closing table. But it gets even better – if you do not have the money to put down on the home, the FHA allows you to receive 100 percent of the down payment as a gift. This leaves you with closing costs, which you can negotiate with the lender or even have the seller pay. In the end, you could end up going to the closing with very little money of your own and walking away from a homeowner.
Plenty of FHA Loan Products Available
Another assumption people make is that the only loan you can get with the FHA is a 30-year fixed loan. Yes, this is the most common loan type that they offer, but it is not the only one. They also offer a variety of other programs, just like conventional loans. If you have the income to support a 15-year mortgage, you can get a 15-year FHA mortgage. If you prefer an adjustable rate mortgage because you need the low introductory interest rate, they offer many different ARM loans too. You just have to shop around with various FHA lenders, of which they are plenty in every area of the United States. Lenders realize the popularity of these programs, so many lenders offer them today.
Credit History Matters more than your Score
A great benefit that pertains only to FHA loans is the ability to ignore a credit score and focus solely on a person’s credit history. The FHA even tells lenders to stop focusing on one bad credit event and to look at the history as a whole. For example, if you become suddenly ill and had a few months of late payments in a row, but had good credit before and after that incident, you may be eligible for an FHA loan. You will need to provide a solid explanation for the event and show how you overcame it, but in the end, the effort is worth it because you are able to get an FHA loan. In general, FHA loans require a credit score over 580, but even if your score is lower, you are not ineligible just yet. The parameters will be a little different if your score is lower than 580 – you will have to put down 10 percent rather than 3.5 percent, but you are still able to get the loan.
When you get your first FHA loan, you might not get the rate you want because of your credit history or because of other circumstances that stand in your way. After 210 days, however, you can refinance with the FHA Streamline refinance. This program enables you to refinance your current FHA loan into another FHA loan with very little verification required. If your credit improves or your income becomes higher, you can ask the lender to consider those factors in your refinance so that you can secure a lower rate or better terms, but in general, if rates drop lower than they were when you first originated the loan, you can refinance without needing a new appraisal or supplying your income documentation again.
Not Just a First-Time Homebuyer’s Loan
Contrary to popular belief, FHA loans are not just for first-time homebuyers any longer. This was the way they used to be advertised, but today they are a great loan for many people. For example, someone with a blemished credit history that was due to a one-time issue, such as a sudden layoff or illness, would probably not have the credit score that conventional loans require just yet, but FHA loans require a lower credit score and are not as hard on applicants with a blemished history. Many people are turning to the FHA for their financing, despite the fact that they have to pay MIP. In the end, the mortgage insurance is worth paying because it gives you the chance to get a mortgage
FHA loans are a great product that offers a lot of versatility. If you are looking for a loan with a shorter term than 30 years or one with an adjustable rate because you need the low rate right now or because you do not plan on staying in the home for very long, FHA mortgages can provide that. Take your time and shop around with various lenders to find the product that is just right for you. Not every FHA lender will provide the same programs, so it is worth the effort to shop around and see what others have to offer.