FHA Loans with
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Are you having a hard time satisfying rigorous lending standards and down-payment requirements? No worries. We are here to introduce you to a less stringent loan type – an FHA mortgage loan! Even though you may have come across the term FHA in your search for a mortgage loan, here we will explain what an FHA loan is and run through its benefits and drawbacks so you can decide whether this home financing option is right for you.
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What is an FHA loan?
An FHA loan is insured by the US Federal Housing Administration and, as such, represents a type of federal assistance to lower income Americans to be able to purchase a home that they would not otherwise be able to afford.
Who qualifies for an FHA loan?
Borrowers can qualify for an FHA loan with a down payment as little as 3.5% for a credit score of 580 or higher. Those with credit scores between 500 and 579 must make down payments of at least 10%. In addition, to obtain an FHA loan, one is required to pay upfront mortgage insurance, which slightly increases monthly payments. Some other requirements include: a valid social security number, a US residency, and legitimate age to have a mortgage in that particular state.
Pros of an FHA loan
Poor credit is OK
You do not have a perfect credit score? That’s alright. FHA loans allows for a down payment as low as 3.5% with a credit score of 580 or higher. With a lower credit score (500-579), down payments are at least 10%, which is still significantly less than other conventional loans. For borrowers with credit scores lower than 500, FHA loans are typically ineligible, even though under certain circumstances the FHA will make allowances through “non-traditional credit history or insufficient credit” provision as long as the borrower is meeting other requirements.
Minimum down payment is as low as 3.5%
A huge attraction of FHA loans is that a down payment of only 3.5% is required to purchase a home. This down payment can be made either through personal savings, a grant from a state, or even local government down-payment assistance program.
Financial hardship relief available
For borrowers that have suffered a serious financial hardship or are struggling to make their payments, loan servicers can offer a relief in various forms. That relief might present itself as a temporary period of forbearance, a loan modification that would lower the interest rate, or prolong the payback period at no interest.
Closing costs resolution
Even though borrowers are typically in charge of covering their closing costs, the FHA allows home sellers, builders, and lenders to help borrowers pay some of the cost, i.e. an appraisal, credit report, or title expenses. In this case, the interest rates may be slightly higher than usual.
Cons of an FHA loan
Mortgage insurance structure
Two types of mortgage insurance are required for an FHA loan – the upfront premium and the annual premium. The upfront premium counts for 1.75% of the loan amount, and is paid as soon as the borrower receives the loan funds. The annual premium is paid monthly, and it depends on the length of the loan, the loan amount, and the initial loan-to-value ratio.
The FHA loan amount is lower than other loan programs in most areas. The FHA lending limit is calculated and updated annually.
Minimum property standards
The FHA established three minimum standards that every loan-financed property must meet: safety, security, and soundness. In other words, the home should protect the health and safety of the occupants, the security of the property, as well as exclude any physical deficiencies or conditions affecting its structural integrity.
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