Before going into the specifics of the FHA loan, it’s crucial to first
address the question: what is a mortgage? You might be surprised to know
how many people don’t understand the terms they signed up for, as
proven by the housing bubble that burst and left hundreds of thousands
of Americans homeless. In basic terms, a mortgage is a collateralized
debt you will take on to pay for your home. Once you default on payments
for a certain period, the bank can take away your home.
What is FHA loan and is it right for me?
The FHA loan allows for a loan downpayment, which makes it attractive
for first time buyers. Why would banks agree to lower the payments for
home loan rates? That’s because the loan is insured against default by
the Federal Housing Administration. Once you default on payments, the
FHA will owe the lender. In theory, nearly everybody can qualify for an
FHA since it doesn’t place a cap on income.
There’s no minimum
credit score under the FHA, or to rephrase it: your credit worthiness
will be assessed individually. Theoretically, even if you have filed for
bankruptcy you are still going to qualify for an FHA . However, even
with the FHA , some lenders might still use your low credit score
against you.
FHA is not a lender
You don’t apply at the FHA for a home loan because it’s an insurance
fund. You need to deal with lenders that are certified by the FHA.
Again, the cost of mortgage can vary from lender to lender, and from
location to location. You won’t be approved, for example, if you take
out a loan greater than the average housing prices in your area. That’s
why it’s crucial that you ask around to get the most attractive home
rates.
What about insurance?
When you
take out an mortgage, grandfathered into the contract are two insurance
premiums: the upfront premium which represents about 2.25% of the total
loan amount as well as the annual premium which is 0.55% of the amount.
You can either pay the upfront premium when you take out the loan or can
be incorporated in your home rates. The annual payment, meanwhile, will
be paid along with the monthly mortgage payment. You must however do
your due diligence and compare the FHA with the rates offered by non-FHA
accredited lender to find out which is better.
