One of the top financing options for homebuyers is Federal Housing Administration (FHA) loans. In 2020, 152,000 homes in the US were bought using government-guaranteed FHA home loans.
Here are some reasons why many homebuyers turn to FHA loans to finance their dream home.
Guaranteed Financing for All Homebuyers
While the home mortgage industry is highly competitive and the interest rates vary from one loan to another, the FHA home financing program remains a rock-solid financing option. FHA loans are guaranteed against losses in case of delinquency and foreclosure. It allows homebuyers to get an even better interest rate than conventional home loans.
Reasonable Loan Limits
Since different counties have different property values, county FMV (Fair Market Value) and house purchase prices determine FHA home loan limits. As of 2021, the lowest loan limit for a single-unit home is $420,680.This limit is within reason since average home prices across the country are about $408,800.
Easier to Qualify
It is easy to get a loan even with blemished credit history with the FHA loan program. Technically, the FHA home financing program does not ask for a minimum credit score.
However, to qualify for an FHA thirty-year mortgage with a 3.5 percent down payment, the homebuyer should at least have a credit score of 580. People whose credit rating falls between 500 and 579 may still get a loan but would need to pay a 10 percent down payment. Furthermore, self-employed and unemployed people may also qualify as FHA borrowers.
Reduced Down Payment
One of the FHA loan requirements is a nominal down payment. An FHA loan program requires a 3.5 percent down payment for a home with a sales price of up to $294,515 and only a 0 percent down payment for home sales prices above $294,515. Some other loan programs require up to a 10 percent down payment.
Lower Interest Rates
Aside from having reduced down payments, FHA home loans are known for their lower interest rates. While conventional loans may offer adjustable interest rates with low initial rates, interest may rise depending on the ARM index and margin.
On the other hand, FHA loans offer a fixed interest rate with a thirty-year repayment period. It is currently at 3.620 percent for a thirty-year mortgage.
Lower Closing Costs
Compared with a conventional loan, FHA loans have lower closing costs, as low as 2 percent of the loan amount. This is because the FHA loan program has a flat rate of one-time mortgage insurance premium. Meanwhile, a conventional loan has a variable rate mortgage insurance premium.
Manageable FHA Mortgage Insurance Premium
The mortgage insurance premiums (MIP) are homeowner-paid, tax-deductible insurance that FHA-approved lenders require borrowers to protect themselves against high-risk borrowers. The current MIP rate is 0.85 percent of the loan amount every year, which they pay monthly.
However, the MIP rate only applies to the mortgage balance. It means that only the homebuyer’s equity is subject to the MIP rate. For example, if the homebuyer gets an FHA loan for $150,000, their monthly MIP should be $112.50 ($150,000 * 0.85 percent = $112.50).
FHA Refinance Availability
The FHA home loan refinancing program allows current homeowners to refinance their existing FHA loan with a lower interest rate. It is possible due to the lower mortgage insurance premium of 0.85 percent. FHA refinance can also help homebuyers save money on their monthly mortgage payments by lowering interest rates.
The FHA home loan program is an excellent financing option for first-time homebuyers and people with low credit scores. It provides guaranteed and affordable financing, flexible financing options, and plenty of benefits for homebuyers, such as lower interest rates and closing costs.
Waymaker Mortgage is one of the best mortgage lenders in Georgetown, TX. We are a licensed, full-service mortgage company offering a wide array of financial solutions to help you purchase your dream home confidently, refinance it easily, and close the deal quickly. Team up with us today!