When buying a home, you will most likely run across information on Federal Housing
Authority (FHA) loans. While there are many factors to consider in the loan selection
process, here are a few of important points.
For the sake of example, let’s say you find a home that meets your family’s needs. The
location is right, the features are right, and you have negotiated a purchase price of
$200,000. Now you need to get a home loan to pay for the property. A bank gives you
two options, Conventional and FHA mortgage, and you need to decide which one fits
The first option is a Conventional mortgage at 5.25% fixed rate for 30 years. This option
comes with a hefty down payment requirement of 20%, which come to $40,000 in this
case. The second choice is a FHA mortgage at 5% fixed rate for 30 years. You will only
need to put 3.5% down or $7,000 in this case. However, there is a 2.25% funding fee
and .5% monthly mortgage insurance that were not included on the Conventional loan
These two loans have some key differences. Do you have $40,000 plus closing costs
to put down on this home? If not, then the Conventional mortgage may not be a viable
option for you. While the FHA loan has a higher price tag and an additional fee upfront
and monthly, it does have a slightly lower interest rate, which helps offset the extra
expense. You need to use a calculator to figure out the costs versus savings to know
exactly what you’re getting. There are online mortgage calculators that make this process
easy. Your credit rating and debt to income ratio are factors in being approved for a loan
of any kind.
In many cases, an FHA loan may be the only option a home buyer can qualify for. In fact,
more FHA loans are being issued now than ever before. The economy has experienced
a downturn, the mortgage crisis occurred, and many people simply do not have the
resources to save a large down payment. A blemished credit history is another problem
that has caused many people to turn to FHA for help.
But, FHA loans are not just for the “tougher cases” or first time buyers. You may
feel your money is better left in the bank than putting it down on your new home, or
perhaps you are refinancing and you want to take out more equity in your home than
Conventional loan limits will allow. Paying off debts with your home equity could save
you quite a bit on your monthly expenses and a slightly higher mortgage payment may be
worth it to you.