If you plan to buy a home, be aware that there are different kinds of loans you can avail. One of which you can apply for is the FHA loan.
FHA is a type of loan that is insured by the government. This does not mean that the government will provide the loan but a person would have to apply for it in various financial institutions who offer the program.
But what is the difference between conventional loans and FHA loans. Find out below:
FHA loans have lower down payments. The requirement is only three percent. Traditional loans require 20 percent down. If it goes below this, private mortgage insurance should be obtained.
With regards to interest rates, it is lower compared to traditional loan. Since it has not regard for credit scoring, there will be no penalties charged by Freddie Mac or Fannie Mae, if your scores happened to fall below 720.
Underwriting isn't strict since there credit scores are not looked into. The underwriting would be focused more on your ability to repay the amount borrowed. People who have less than perfect credit scores and those who have undergone bankruptcy and foreclosure (2 and 3 years respectively from discharge of debts) can actually avail of the loan.
If a borrower decides to settle their FHA loans before its due date, he or she would not be sanctioned with prepayment penalties.
FHA loans have limits. Mortgage maximum can be viewed in the HUD site. In there you will see the cap amounts for one-family to four family homes of various states. This is what traditional loan does not have. In traditional loans, you can loan amount depending on the fair market value of the property.
As to mortgage insurance, FHA loan requires 1.5% insurance that needs to be paid during the closing. An annual renewal of the said insurance will be paid, which is .5% of the premium. Conventional insurance will only require Private Mortgage Insurance if the down payment falls below 20%.
The FHA loan can be assumed by another person. This is one of its great features. This is an advantage for those who want to sell their homes. The buyer can assume the loan just as long as he or she meets the requirements.
FHA loans are actually perfect for those who cannot afford the cost of traditional mortgage and for those who are first timers in buying homes. It is a good way to familiarize the field of home buying. And of course, this will help borrowers obtain a mortgage plan that is surely affordable.
Even if FHA is affordable, this does not automatically make it better than conventional loans. Take note that the loan amount is actually very limited. However, this can help home buyers widen their option, knowing that they can obtain affordable loans to be able to buy quality homes. This is one type of loan to look for and any person should be able to weigh the pros and cons before going committing to this kind of loan.
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