About 20 percent of people who apply for a mortgage will choose a Federal Housing Administration (FHA) loan. This type of loan is insured by the FHA and issued by an FHA-approved lender.
According to the U.S Department of Housing and Urban Development, the purpose of this government agency is to help protect lenders against potential losses. The Federal Housing Administration also helps people with a lower credit score and down payment buy a home. Here’s what you should know about FHA loans.
Types of FHA Loans
A wide variety of FHA loans are available, serving a number of different purposes. Here are a few of the most common.
Fixed Rate
With this loan option, the interest rate on a mortgage will remain the same through the entire loan term. As a result, monthly payments will also be consistent. The FHA’s fixed rate loans are available with 15 and 30-year terms.
Adjustable-Rate Mortgage (ARM)
Unlike the fixed rate loan, ARM’s interest rate has the ability to change once a year. It can increase or decrease based on a variety of indexes, including the one-year constant-maturity Treasury (CMT) securities and the prime rate. Adjustable-rate mortgages come with a ceiling, so your rate cannot get too high.
Energy Efficient Mortgage
The energy efficient mortgage loan can help homeowners lower their utility bills. This program allows you to borrow money to upgrade your home to be more energy efficient. By lowering electric and other operating costs, you will have more money available to make mortgage payments.
How to Qualify
You can get financing with only 3.5 percent down, as long as your credit score is 580 or above. Even with a lower credit score, you can still qualify for financing with a larger percentage down. Keep in mind, requirements and guidelines will differ depending on the lender you choose.
FHA Loan Pros
- Does not require perfect credit
- Low down payment requirements
- Higher debt-to-income ratio is allowed
- No income limits
FHA Loan Cons
- Lower loan limits
- Higher upfront costs
- Higher mortgage insurance costs
- Less flexible
Have you already been pre-approved for a mortgage loan? Browse our active communities to find your future home!