Benefits of an FHA Loan
FHA loans are extremely popular with first time home buyers, but also with people who may have difficulty qualifying for a conventional loan. These are some of the amazing benefits of an FHA loan and why you may want to consider this mortgage program for the purchase of a home or a refinance.
When weighing your options to determine which loan is best for you, consider some of these benefits and then decide whether an FHA should be your choice.
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Most Common Benefits of an FHA Loan
1. Low Down Payment – FHA loans have a very low down payment of 3.5%. It is also a popular mortgage program to bundle with down payment assistance. If you purchase a home for $200,000 for example, your down payment would be $7,000.
2. Lower Credit Scores – The FHA credit score guidelines allow for credit scores as low as 500. One of the challenges is to find a lender willing to accept scores that low. With scores under 580, the down payment would be 10%. Read [FHA Credit Requirements]
3. Higher DTI– With an FHA loan, lenders can approve loans for borrowers with a DTI up to 56.9%. This FHA loan benefit will allow you to qualify for a higher loan amount than what conventional loans will permit.
4. Shorter Bankruptcy Waiting Period – For those who have a recent bankruptcy, FHA loans have the shortest waiting period before you can apply for a mortgage. If you had a Chapter 7 you have to wait just 2 years. With a Chapter 13, you can qualify after you have made 12 bankruptcy payments.
5. Down Payment Assistance Programs Permitted – For many first time home buyers, they lack the funds needed for the down payment or closing costs. Down payment assistance programs fit nicely with FHA loans because the required down payment is very small. All you need is an FHA pre-approval letter to provide to your down payment assistance program administrators. See this list of Down Payment Assistance Programs.
6. Seller Closing Cost Contributions – The FHA guidelines permit seller contributions of up to 6% of the purchase price. The closing costs for many FHA loans are less than 6%, however you can use the difference to buy down your rate so your monthly payments will be lower.
7. Co-signers and Co-borrowers Allowed – When you need more income to qualify for a mortgage, you can add a co-signer or a co-borrower to the mortgage. Co-borrowers will not only be on the mortgage, but they will also have ownership in the property.
8. Multi Family Homes are Permitted – You can purchase a multi family home of up to 4 units with an FHA loan and only a 3.5% down payment. Another benefit is the income coming from the other units in the home can be used to help you to qualify for the mortgage. The FHA loan limits are set higher for multi family homes which makes sense since they are traditionally more expensive.
9. No Prepayment Penalties – There are no prepayment penalties with FHA loans. This provides the freedom to sell the home or refinance without paying a financial penalty for terminating or paying down the mortgage prematurely.
10. FHA Loans Can be Used to Rehab a Home – FHA loans come in various formats and one of the better programs available is the FHA 203k rehab loan. This this program, you can finance the purchase of the home and also include the funds needed to rehabilitate or simply make upgrades to the home.
11. FHA Loans Can be Used to Build a New Home – You can use an FHA loan to purchase a lot and also finance the construction of a new home all with one loan called the FHA One Time Close Construction loan.
12. Competitive Rates – FHA loans have rates that are as competitive as conventional mortgage rates especially when factoring in lower credit scores.
13. Availability – FHA loans are easy to find because virtually every lender in the US offers them. What becomes more difficult is to find a lender that offers all of the FHA loan programs, or one that will allow for lower credit scores.
Benefits of an FHA Loan Summary
In Summary, FHA loans provide significant benefits for not only first time home buyers, but anyone who has challenges in qualifying for a conventional loan. If one of these situations applies to you, then you may benefit from an FHA loan:
- Low credit scores
- Small Down Payment
- Low income
- Recent Bankruptcy
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Benefits of an FHA Loan for the Seller
In many instances, sellers prefer when buyers use a different type of financing because they are afraid they will have to make some repairs before closing. In fact, many real estate agents tell their clients not to accept offers from buyers who plan to use an FHA loan.
It is true that many sellers have repair issues with their homes. Often times the home is outdated and needs some upgrades to bring it up to today’s standards.
With the FHA 203k rehab loan, home buyers can purchase the home and also include rehab funds into their loan amount. This enables them to make the improvements they want to make and according to their taste, versus have the seller guess what they want.
This loan program needs to be used as a tool to buy and sell homes. Unfortunately, many lenders do not offer the program. To read more about how it works, read [FHA 203k rehab loans]
What Others are Saying About the Benefits of an FHA Loan
Some industry experts weigh in on the benefits of an FHA loan to either purchase or refinance a home.
Eric Jeanette – “FHA loans are critical in helping people to qualify for a mortgage when they may not meet the standards set by Fannie Mae for a conventional mortgage“.
Bill Gassett of Maximum Real Estate Exposure says “Two of the most significant benefits of an FHA loan are the low down payment requirement of 3.5 percent and more relaxed credit requirements. Without FHA loans a significant percentage of buyers would be locked out of homeownership.“
Paul Sian, Real Estate Agent Cincinnati, OH with United Real Estate Home Connections adds “The FHA Loan is a great loan program to help first time home buyers get into a home with a low down payment and favorable terms for the buyer. First time home buyers should sit down with a mortgage lender to explore all options available to them.”
Alex Coppozolo of SD House Guys, “FHA loans enable people to enter homeownership with little money down. During a real estate market like today with soaring interest rates, FHA loan products are the only options for many homebuyers.”