There is a lot of mystery surrounding the mortgage financing world. With many different loan types and mortgage providers, it becomes difficult to know where to start. We are going to analyze, and break down, one of the most common loan types available, the FHA loan.
Before we talk about specifics, including pros and cons of using the FHA loan, lets explain the history behind it. FHA is the acronym for the Federal Housing Authority. The FHA was formed in 1934 during the Great Depression. This was done to spur home construction, reduce unemployment and increase the availability of loans to people.
Over the years the FHA has taken on many roles but at its core has kept the mission to keep housing affordable and achievable by all. They do this by giving low down payment loan options to those that can't afford other loan types with higher down payments. Traditionally the FHA loan offers a 3.5% down payment while most others offer 5% and more. This truly opened the doors to more people attaining their goals of home ownership, especially because this loan is available for single-family homes, condos and multi-family up to a fourplex.
The FHA doesn't actually write any loans, they leave that to mortgage providers. The FHA just guarantees the loans themselves to the loan providers. For example, you could go to banks such as Wells Fargo, Key Bank, Alaska USA or any slough of local banks or credit unions to apply for a FHA home loan. When those institutions give you a loan, it's the bank who writes the loan and the FHA guarantees the bank that it will be paid.
The FHA does add extra monthly fees, in addition to the loan payment, that exist as mortgage insurance. This fee is what helps the FHA guarantee the loan to your lender. This extra fee can add quite a bit to your monthly payment, so always check with your mortgage provider to see what your best options are. This extra fee can be removed from your loan once you put 20% equity into your home.
There are quite a bit of special circumstances that people may qualify for, so it’s important to check with your mortgage provider to see if you qualify. For example, for people who may not have enough for a down payment, there are certain federal down payment grants that you may qualify for to cover that cost.
Additionally, there are also programs available to help people fix up a home. These are not always offered and more difficult to qualify for. However, if approved, you would take a out a loan for more than the purchase price and use the extra money to pay a contractor to complete the repairs or updates. The banks can’t lend you any more money then what the home will appraise for after the repairs, so you have to purchase an undervalued home to utilize this loan.
Lastly, keep in mind that there are some cons to using the FHA loan. With such a small down payment, it may be difficult to sell your home at a profit within the first several years. When selling a home it is typical for the seller to pay 6% to 8% in fees. This money goes to title companies, closing costs, repairs, and real estate agent commissions. I typically recommend looking at differing loan types, renting out your property or staying longer in the home, if you plan on moving within a couple of years of your purchase.
There are so many different options available for even just a FHA loan, so make sure to get the expert advice of a trusted mortgage loan provider. They will be able to help you find the perfect program for your situation, because no two peoples credit and history is the same. If you need help locating that expert feel free to give me a call at 907-302-1011 or email us at email@example.com!