FHA has become a popular choice of many first time home buyers. FHA stands for Federal Housing Administration. It insures loans, made by approved FHA lenders, they do not lend directly to borrowers. FHA provides lenders with insurance, in case a borrower defaults on his loan. But before purchasing your dream house in America, you need to do a thorough research regarding US home mortgages . This will acquaint you with the terms and policies of FHA loans and the conventional loans. People often associate FHA loans with purchase money transactions. While purchases are the most common use, FHA loans are also available for rate and term refinance loans, as well as Cash Out refinances. On the other hand, the term Conventional Loan includes all loans under the current Fannie Mae and Freddie Mac lending limits. Some of these may be called Conforming, A paper, sub prime, Alt A, A Minus, BC (bad credit) and other industry names.
The main advantage of FHA over a conventional loan is that, the credit qualifying criteria for a borrower are not as rigid as conventional loan financing and the down payment. Equity requirements are less. The FHA loan will generally have the least amount of money required to close and the lower payment. FHA loans allow the borrower who has had a few "credit problems" or those without a credit history to buy a home. Most notably, condoning the borrowers, surrounding a bankruptcy that was discharged 2 years ago. They can be approved for maximum financing.
Whereas, Conventional A Paper financing would require 4 years to have passed to be eligible for consideration. It relies heavily upon credit scoring. If your score is below the minimum standard, you will not qualify or you will be placed in a higher rate Sub prime, Alt A or A minus loan product. If a borrower does have past credit issues, an FHA loan may be significantly cheaper than an alternative loan such as sub prime, ALT A, or A minus. These other programs generally have higher interest rate, and require larger down payment or Equity position. Many of the alternative loan products have Pre Payment penalties unlike FHA loans. In fact FHA loans can be easily refinanced under the Streamline program. Another benefit of FHA loan is that, it is one of the few home mortgage programs allowing a borrower to have his down payment gifted from a family member, a governmental agency, or non-profit organization. This allows home buyers without the necessary money to buy a home today.
However, FHA charges an annual renewal mortgage insurance premium of 0.5% to 0.55% of the loan amount. But this fee is generally half, charged by low down payment Conforming A Paper conventional mortgages, Sub prime, Alt A and A minus. For $100,000 mortgage, FHA would charge approximately $41.67 per month. A typical low down (3%) conventional mortgage with a renewal premium of 0.78% would charge $65.00 per month. That is $280 savings per year. However, conventional financing does not require an upfront mortgage insurance premium when a borrower closes on the loan. With FHA financing, that fee for a 30 year loan is 1.75% of the loan amount that the borrower can wrap into the mortgage. On a $100,000 for 30 years at 8%, that's an additional $11.51 that the borrower must pay each month. That's almost an additional $132, the borrower must pay each year. But the main drawback to FHA loans is that the loan limits set for FHA loans are typically less than the loan limits for conventional financing in most parts of the US.
Now any body can buy a home, thanks to FHA loans. The mortgage, you get with an FHA loan is insured by a government agency. Hence, several costs associated with a home loan, may be lowered or dropped out completely. A new program launched in 2007, known as FHA-Secure, can also be of assistance to first time home buyers. Thus we see that FHA loans have an upper hand over conventional loans. That's the reason why FHA loans are in greater demand in the US. Even if you think you haven't saved enough to be granted a home mortgage loan, still you can avail the FHA loan easily. For FHA helps you, realize your dreams. So start dreaming!
