Getting an FHA loan requires different qualifications from those of a conventional loan. Before I go into detail about what these qualifications are, let’s take a minute to learn the origins of FHA loans. In 1934, the Federal Housing Administration, or FHA, was formed and began working towards better home construction standards. The FHA was also tasked with providing real estate financing. This new government organization worked toward improving the chances of people to get home loans. While the FHA doesn’t directly give out loans, they work with a wide range of banks and lending institutions to provide consumers with affordable, lower interest loans. The FHA helps to insure loans, and this gives the banks an incentive to loan out the money. For a relatively small fee called a Mortgage Insurance Premium or MIP, the FHA insures the loan. This gives the financial institution peace of mind that the loan will be paid if defaulted on by the borrower. This fee is paid for by the borrower when the loan is closed in a lump sum. Borrowers can also add the MIP fee to the home loan and pay it over time.
Advantages of an FHA Loan
One of the most attractive features of getting an FHA loan is the very low down payment that is needed to secure the loan. FHA loans require only 3.5% down, while traditional loans now require 5% and up in order to qualify. Another feature that makes FHA loans attractive is that their interest rates are lower than the prevailing market rates. People also like FHA loans because there are no prepayment penalties. Some traditional loans will charge you a fee if you wish to pay off the loan before the maturity date.
When you are buying a home through the FHA, the property has to pass certain construction standards. If the home is consider in ill repair, the seller will have to make certain repairs before the loan will be made. While this can be a disadvantage in some situations, (which I’ll describe later in this article), it does mean the new homeowner won’t have to worry about certain repairs when getting started in their new home. Also, there is the option of getting a type of FHA loan that includes a certain amount of money that you can put toward the cost of making repairs on the property.