Due to relaxed restrictions, FHA loans can be very appealing. However, those considering them should be aware of some potential pitfalls that can become costly over time.
FHA home loans offer a unique borrowing options to prospective homebuyers. First established during the Great Depression of the 1930’s, FHA loans are mortgages that are insured by the Federal Housing Administration (FHA). Due to the relaxed restrictions surrounding FHA loans, they can sometime present a better offer to buyers than a conventional home loan.
However, before deciding to apply for an FHA loan, it’s important to ensure that you understand how this type of loan works and the various pros and cons that are associated with it.
Simply put, FHA loans help make homeownership more affordable for those who might not be able to purchase a home with conventional loans. This is due to the fact that potential homebuyers can qualify with a down payment of just 3.5%. You can also gain approval with a low credit score (though you’ll need two lines of credit and proof that you’re paying off any outstanding credit card debt) – and still garner a good, low interest rate.
It’s also easier to use gifted money for the down payment of the loan. A few states also offer grant programs to help with the down payment.
This is a tremendous asset to a younger buyers or those who are purchasing their first home and may struggle to save up to 20% of the home value for a down payment.
There is a potential downside. FHA loans are insured by the federal housing administration. As with all insurance, the borrower has to pay the premium and this can become costly over the life of the loan.
However, if you’re needing to buy a home and are looking to pay less than 5% for your downpayment, an FHA loan might be the right decision for you.
If you’re looking to buy a home and would like to know more about FHA loans, contact our offices in Joplin, MO. We are experienced mortgage lenders and can help you choose the right plan for you.