What is an FHA loan?
FHA (Federal Housing Administration) loans were established in 1934 when foreclosures were high and lenders were reluctant to approve mortgages for all but the least risky of borrowers.
Home loans insured by the FHA are once again gaining in popularity as more lenders tighten their borrowing guidelines. FHA loans can be a viable –and sometimes less expensive alternative for borrowers making a small down payment.
Here are the basics on government-insured FHA loans.
On the upside. . .
• Low down payment. Most conventional loans require at least 5 percent down, and in a tight mortgage market many lenders prefer to see 10 percent or more. By contrast, FHA loans require a down payment of only 3 percent.
• More lenient approval guidelines. FHA loans follow a different approval model than most conventional loans. You do need decent credit, but it does not have to be perfect or even nearly perfect. Even a bankruptcy or foreclosure may not prevent you from getting an FHA loan. In addition, FHA loans allow for a greater percentage of your gross income to be used for debt (up to 41 percent, compared to 36 percent for conventional loans).
• Just about anyone is eligible. Unlike most other “affordable” loan programs, FHA loans do not carry a maximum allowable income cap. All you need to be eligible is a valid social security number and legal US residency.
On the downside. . .
• Lower loan amounts. Maximum allowable loan amounts vary by state and metropolitan area, but are typically lower than conventional loan limits. You can get the loan limit for your area by visiting the HUD website and entering your state and county.
• Not all lenders are good at FHA loans. If you think an FHA loan might be for you, choose your lender carefully. The guidelines and paperwork are different enough that unless a lender specializes in “government lending” (FHA and VA loans), you could face delays and unwelcome surprises.
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