Don’t sign what you don’t understand, right? FHA loan definitions can be confusing sometimes, but no need to worry because it doesn’t have to be complicated.
What is an FHA loan?
An FHA loan accepts borrowers with lower credit scores as it is a government-backed mortgage insured by the Federal Housing Administration. FHA loans have a more relaxed qualification process as compared to conventional loans. Borrowers who are in the process of purchasing their first homes veer towards getting an FHA loan usually because of its more straightforward approval process.
How does my credit score come into play?
Regarding FHA loans, you can put in a down payment of as low as 3.5 % if you have a credit score of at least 580. Imagine if the house you want to buy is valued at $320,000. All you need to put in as a down payment is $11,200! If your credit score is between 500-579, you will have to put in a 10% down payment or $32,000 for a $320k house. If you are near a score of 580 and taking out an FHA loan can wait, it is best to improve your credit scores first to get the best rates possible.
What is FHA mortgage insurance?
Once approved, your FHA loan will either be a 15-year or 30-year term, and it comes with a fixed interest. You may wonder why FHA is not rigid and can give generous terms. Here is where the FHA mortgage insurance comes into the picture. Mortgage insurance is a requirement for loans that require borrowers to put in a down payment of less than 20%. The FHA mortgage insurance protects the lender once the borrower defaults on his payments.
There are two kinds of mortgage insurance premiums – the first one is the upfront mortgage insurance premiums, which are 1.75% of the loan amount and paid during closing and can be included in the loan amount. The second kind of mortgage insurance premium is the annual premium, which is 0.45% or 1.05% depending on the loan term. The annual premium is divided and paid monthly for 12 months. For more detailed and updated requirements, let us help you.