New American Funding Blog

Advantages of an FHA Loan

By Yelaine   |  August 20, 2014

When the thought of purchasing a home comes up, it’s probably safe to assume that 95 -100% of people don’t pursue a purchase because they believe they must have a 20% down payment. Now, this just isn’t true. Through an FHA Loan, a borrower only needs to come up with a 3.5% down payment. How great is that!? I recently found this out through the purchase of my home. I’d like to take a few minutes, to discuss with you, in the simplest way possible, what I found to be the advantages of an FHA loan.

What is an FHA LOAN

To better understand this question, let’s first define who or what the FHA is. The Federal Housing Administration, or FHA, is a United States government agency that was created in 1934 - it insures mortgage loans through FHA approved lenders. According to their website, it is the largest insurer of mortgages in the world, with over 34 million – yes, you heard right – properties.

Now that we are up to speed on whom they are, let’s define what they do. In essence, the FHA is to your lender what your car insurance is to you, piece of mind. The FHA protects lenders against homeowners that default on their mortgage payments by paying the lender a claim if the homeowner stops paying. This insurance provides less risk for the lender, which increases the loans appeal and the likelihood that the loan will be granted.

Advantages

Smaller Down Payment

This, I think, is the biggest advantage, an FHA loan will allow for a minimal down payment of 3.5% of the home value to put down compared to a conventional loan where 10 – 20% is the norm. Clearly this has a high appeal for borrowers that cannot afford a traditional down payment.

Side Note: If you combined the FHA loan with a down payment assistance program, such as CHDAP, you could be looking at a down payment of .5% to zero down!

Assistance

Another great thing about the program is having the ability to use gift funds to cover the down payment and closing costs. In other words, if you yourself do not have the 3.5% required down payment, but your mom, dad, or any other family member does, and they want to gift it to you, you are able to use that money.

Pre-payment Penalty

If you prepay your mortgage before a certain amount of time, lenders will charge a prepayment penalty. With an FHA loan there is none. If you are able to pay your mortgage off before the full term of the loan, you can do just that.

Credit

Do you have a blemished credit history? No worries, if your credit is less than perfect, an FHA loan will accommodate it. Keep in mind, if you have an abundance of late payments, foreclosures, bankruptcies, tax liens, or legal judgments, you might have a harder time qualifying. The underwriter will be looking for your overall pattern in your credit behavior – if there is an isolated incident exceptions can be made.

Assumable

One of the most interesting facts about FHA loans that I found is that an FHA loan is an assumable loan. What does this mean? Well, if you decide to sell your home, the buyer can assume your mortgage (rate, repayment period, current principal balance, and any other terms in the existing loan). Although the process could be a tedious one, it is doable if it makes sense for both buyer and seller and of course if both can meet the guidelines.

 All loans, like all buyers, aren’t made equal. Do your re-search before you decide on what loan you want to pursue. But if any of the aforementioned is a worry in your mind as to why you think you cannot purchase a home, an FHA might be right for you. Good luck in your home purchase journey!

If your family or friends could benefit from knowing the advantages of an FHA loan, please email or post to your Social Medias!

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