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Why FHA Loans Are Growing in Popularity
Author David Schneider | Nov 16,2007
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First-time homebuyers often have trouble gaining loan approval due to marginal credit scores and/or the need for a large down payment. To help low- and middle-income families purchase a home, the Department of Housing and Urban Development (HUD) offers FHA loans. FHA loans have been growing in popularity in recent years because they provide numerous benefits when compared to other options for first-time homebuyers struggling to obtain approval for traditional home mortgage loans.
What is an FHA Loan?
An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (a division of HUD). It is specifically designed to help families that do not meet the down payment requirements of traditional loans. To apply for an FHA loan, you simply need to apply to a HUD-approved mortgage lender. If you have a decent credit record, enough money to purchase the loan and a high enough income to cover the monthly loan payments, then you should be able to gain approval for an FHA loan.
Comparing an FHA Loan to Other Options
An FHA loan is often the most cost effective way to buy a home for individuals who cannot afford or gain approval for a traditional mortgage loan. Interest-only loans, sub-prime loans and other non-traditional loans will typically end up costing you much more than an FHA loan due to high interest rates. Since the FHA underwrites an FHA loan, you can typically obtain a better interest rate than you could otherwise.
Requirements of an FHA Loan
Many homebuyers find FHA loans to be favorable because of the relatively flexible approval requirements. A less-than-ideal credit history is acceptable to the FHA as long as your credit score has not been negatively impacted by large amounts of debt or bankruptcy. Typically, the maximum ratio of total debt that will allow you acquire an FHA loan is 41 percent -- well above the standard for traditional mortgage loans.
An FHA loan also requires a down payment of at least three percent of the home's sale price. This is dramatically lower than the typical 20 percent required for a traditional mortgage. There are also maximum limits set on the amount you can borrow through an FHA loan. This limit varies from state county to county, but a general range you can expect to receive is from about $200,000 to $360,000.
Growing Popularity of FHA Loans
Mortgage experts are anticipating a resurgence in popularity for FHA loans in the coming years. Since the mid-1990s, the growing availability of interest-only loans and relaxed requirements of sub-prime loans had caused the volume of FHA loans purchased to decrease. As foreclosures have increased due to these expensive loans, tougher requirements are beginning to be enforced.
Educating new homebuyers about the benefits of FHA loans is also expected to increase their popularity. Many borrowers simply do not know the benefits of an FHA loan over a sub-prime loan. An FHA loan will likely provide borrowers with a lower interest rate, more mortgage options and no prepayment penalties when compared to a sub-prime mortgage loan. As the knowledge of these benefits becomes more apparent, more and more people will turn to an FHA loan to fund the purchase of their new home. |
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