The Federal Housing Administration (FHA) insures mortgages to
allow low to moderate income families to purchase their own
home. With government backing, families can buy a home at a
lower initial cost. However, there are limitations with this
program.
Mortgage Insurance - Section 203(b)
The FHA provides mortgage insurance, not mortgage loans to
families. However, this program can reduce the cost of a home
loan by thousands of dollars. The program also encourages
lenders to finance mortgages for people who might just miss the
underwriting requirements. For example, FHA loans require a
smaller down payment.
With FHA's Section 203(b) program, a homebuyer can purchase a
new or used one to four family home. However, the buyer has to
live in the home.
FHA Benefits
A FHA mortgage allows some borrowers to qualify for the lower
interest rates of a conventional loan, rather than using a
higher rate sub-prime mortgage. This can save thousands in
interest charges.
Required down payments are also smaller. Instead of the typical
10% down, a buyer can put down as little as 3%. The closing
costs can also be financed with the mortgage, lowering the
initial costs of purchasing a home.
The FHA also limits fees that can be charged to the borrower.
For example, the loan origination fee cannot surpass 1% of the
mortgage amount.
Drawbacks
FHA loans do have their drawbacks and are not for everyone. For
instance, the FHA sets loan limits to ensure the program serves
low to moderate income families. You may find with these loan
caps that you will need to apply for a conventional or jumbo
loan to purchase your home.
You also have to use the house as your primary residence. If you
are looking to invest in property or buy a vacation home, then
you will need to look at other financing sources.
Applying For FHA Mortgage
FHA insured mortgages are provided through approved financial
institution. Fortunately, many of today's lenders are approved.
Just like with any type of loan, you should compare rates of
different lending companies. An FHA approved institution doesn't
necessarily mean they offer the lowest rates.
You can easily find rates and terms online by searching
individual sites or using a mortgage broker site. By collecting
quotes, you can research rates without hurting your credit
score.
About the author:
See our
Recommended FHA Lenders Online. Carrie Reeder is the owner
of
ABC Loan Guide, an
informational website about various types of loans.
