Those who are looking to purchase a home may have come across the term FHA loan and not know what it is. The acronym FHA stands for Federal Housing Administration. The loan is actually not a loan. It is government-backed insurance for the lender of a home loan. It helps reduce the risk for the lender of a mortgage by providing insurance on the loan. There are some advantages and disadvantages to an FHA loan.
Advantages
The main advantage obviously goes to the lender. This is because the FHA guarantees that lenders will be paid for the loan whether the borrower is able to make the payments or not. There are also advantages for those looking to buy a home when it comes to FHA mortgage insurance. Lenders typically allow smaller down payments on FHA loans because their risk in the deal is lower. This means that those who have less cash on hand may have an easier time getting a home loan.
The low down payment is certainly a big reason why younger home buyers utilize FHA loans. They typically have less cash on hand for such a purpose. One top of that, those who may have a poor credit history, including bankruptcy, may qualify for an FHA loan. It can be a great way for someone with bad credit to be able to purchase a home and rebuild their credit history by completing loan payments.
Disadvantages
Of course, there are drawbacks to an FHA loan. The lower down payment on an FHA loan causes the loan to have a higher interest rate. These types of loans also require a mortgage insurance premium to be paid on the loan. The insurance premium could last throughout the lifespan of the loan in some cases. This can be a huge added cost to the loan for some people which may deter them from obtaining an FHA loan.
One way to reduce this effect is to choose a 15-year loan instead of a 30-year loan. Any property bought with an FHA loan must also be approved and appraised by the Federal Housing Administration.
FHA loans are by far the easiest loan to obtain for aspiring home buyers. They a great benefit to young, first-time home buyers and those with a bad credit history because of the easy approval and low down payment option. They do come with a catch, though. Anyone who is buying a home should explore their options to see if an FHA loan is right for their needs. Those who can afford a 20% down payment may be better off seeking a more conventional loan to help them avoid higher interest rates and added insurance costs.
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