We all know that FHA always provides helping hand to the home-buyers through their loan programs. In the time of down-sized market, getting a home becomes quite impossible for those who are suffered from low credit scores, high debt-to-income ratio, or lack of credit history. Today FHA loans are considered as a flexible and rewarding products which can help non-eligible persons for getting a mortgage to buy their dream home.
People have some misconception about FHA & it's rates. Let us discuss about those myths & check if there is any truth lies in it. Do not hesitate to clear out any misconception which might prevent you from being approved.
1. Myth 1 – FHA is a mortgage lending company :
Truth - The statement is totally false. FHA is neither a lender nor a lending company. FHA is a mortgage insurer.
The word "FHA" denotes “Federal Housing Administration” which is a federal agency associated with HUD (U.S. Department of Housing and Urban Development). It is a misconception that FHA provides mortgage loan to the new home-buyers. Rather, the FHA insures the interest of credit unions, financial banks and other lenders. The FHA reimburses the loss to the lenders if FHA-insured loans gets defaulted or in case of having a short sale or foreclosure.
2. Myth 2 : FHA loans are solely tailored for first-time - home buyers
Truth - FHA loans are not only meant for the home buyer who wants to buy homes first-time. Both New home buyers & other home-buyers can apply for FHA loans.
As FHA loans have lower down payment requirements than conventional loans, so it is often advertised as a helping tool for first time home-buyers. Through last 10 years, it is seen that many home-owners have lost their homes due to decreased home equity in the housing market downfall. After having the short sale & repaying former mortgage debt, those home-buyers are often interested to invest their remaining money towards small down payments.
However, if you are a interested first time home buyer, you might have the chance to reduce your PMI premiums through FHA loans.
Myth 3 : 20 Percent Down payment is mandatory for FHA loan
Truth - FHA loan does not require 20 percent of the loan amount as down payment. It is for those home-buyers who can't arrange 20% or more , but able to pay 4% 5% initially.
For prospecting home buyers, FHA needs only 3.5% of the total loan amount as initial down payment. This is the most important factor for which FHA is pronounced as the most lenient mortgage plan in USA. But if you are getting the 3.5% down-payment as a gift then some credit restrictions will be effected. Amount from someone like father, brother or any other family member, friends or colleagues/employer or from any charitable trust/ federal home-buyer program etc will be considered as gift.
There are other low-down payment mortgage programs like The VA loan, The USDA Rural Development loan etc also have 100% financing options. But these loan programs also have different eligibility requirements which sometimes people can't afford.
Myth 4 : FHA loans are much costlier than other
Truth – FHA loans are not expensive generally. But it depends upon the nature of the loan. Your down payment amount, size of the loan & location also affects the long term expenses of an FHA loan.
It is not the FHA mortgage rates which affects the costs..it is seen that the other conventional mortgage rates are quite higher than FHA mortgages. The main biggest cost in FHA is the cost of mortgage insurance. The insurance premium in FHA are meant to protect & insure the loan against getting default .
FHA mortgage insurance premiums can be paid in two ways, 1) Upfront, 2) Annual. In the first method, Upfront premium would be paid in advance at the time of closing which will be added to the loan balance. Upfront premiums can be determined from 0.35% to 1.5%.
The other method i.e Annual will require separate monthly payments added up with monthly loan installments which are paid in monthly installments along with your mortgage payment. Premiums can be determined from 1.55% (in California, orange county, Maryland, Potomac and New York City) to 1.35% annually.
If you compare FHA with conventional loans, you will find the FHA sometimes costly or sometimes much cheaper. So, you need to consult a experienced loan officer before taking any decision. The FHA provides security regarding home loans in all 50 states. Apart from that, FHA also provides mortgage loan service to different U.S. territories including Puerto Rico, Guam and the U.S. Virgin Islands. It doesn't matter whether you are going to buy a house for the first time or multiple times, if you are interested to get the most penny saving way to get a mortgage loan, FHA insured loans will be the best option for you.