What does FHA stand for? It is called an FHA Loan because it is insured by the Federal Housing Association. Because it is backed by the Federal Housing Association, banks are more willing to lend to the future homeowner. Lenders have specific criteria that they follow to approve a loan, but with loan programs, it means your type of loan is backed by a more credible source. Therefore, that criteria for getting a home loan from a lender may be different, and you may be eligible when you wouldn’t be with a conventional loan. Different programs work better for different people.
What is typical for an FHA Loan? The most typical route you see people doing with FHA loans is having a 660 or better credit score, putting a 3% down payment on the house, and they get around a 3% interest rate on the home.
Can my interest rate be lower or higher than 3%? That is just about the average for an FHA loan right now. Your interest rate will depend on your credit score, income, and other factors that lenders consider. If you get a conventional loan, your rate could be lower than 3%, but that means a bigger down payment. With a FHA loan, the interest rate will be a little higher than the average interest rate on a conventional loan.
How do I know if an FHA loan is right for me? The FHA loan actually covers down to a 500 credit score, but if your credit score is between 500-580, you will have to put down a larger percentage down payment (10%). Some people have enough money saved and it may work great for you, but you’ll also have a higher interest rate.
Lenders want to know that you will pay back the money you borrow, and with a lower credit score, it shows you are a riskier candidate to lend money. To offset that risk, banks will increase your interest rate. That means that you’ll be paying more money back over the life of your loan, than you would be with a higher credit score.
It’s important to evaluate your own goals, and how important owning your own home is to know what is right for you. It is a big responsibility, and you will want to make sure you can pay your mortgage, as well as other costs that come with a home. With that said, FHA is a great way to get into a home that you feel confident is in your budget without having to save for a conventional (20%) down payment.
Most people that get FHA loans are people that have a decent job, are working on building their credit, and are just tired of paying rent when they could be building equity in a home.
Wait, I have to pay Private Mortgage Insurance when I get an FHA loan? Yes. When you use any kind of a loan program that helps you get into a home, you will likely have to pay something called private mortgage insurance. This is a payment which is lumped into your mortgage. It is another safety net for the lender to know you are credible and capable of paying your loan back.
How much is Private Mortgage Insurance? It depends on the size of your loan and can vary but is usually around $100. This is lumped into your mortgage payment, but it is important to know exactly what you are paying and why when you are buying a home.