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What is an FHA Loan?


Been wanting to know what an FHA loan is?

An FHA loan is a mortgage facilitated and guaranteed by the Federal Housing Administration or FHA. The Federal Housing Administration is the government agency tasked to help buyers obtain a mortgage easily. Or simply put: it is there to help people own a house through a small down payment (3.5% is an example).

Many lenders feel confident in granting mortgage loans—even large ones—to home buyers because the FHA is there to pay in case the buyers default or stop paying.

Many people choose this type of home-acquisition option because they know what the FHA loan’s advantages are.

An FHA loan can be acquired by nearly anybody, and that is what makes it really popular among those wanting to own a home. However, limitations have been set on the amount of the loans. Apparently, the amount of the loans are tied to the amount needed for purchasing a home. Thus, the prices of homes in an area have a direct bearing on the FHA loan amount allowed to be taken out.

So, if a prospective buyer eyes a house that has a big price tag, they might become frustrated at the amount offered by an FHA loan. They would need to take out a larger mortgage somewhere else. Thus, if one is interested in obtaining a mortgage under this loan scheme, one has to know first what is an FHA loan limitation for their area or region.

The acquisition of an FHA loan is described as possible for nearly anybody, because there are no income limits set. However, it is good to note that an “ok” credit score is required.

What that means is that your debt to income ratio should be around 40-50%.

An FHA loan has many advantages like – no prepayment penalties, the possibility of leniency (during tough economic times), the ability to be assumed, and the chance to avail of home improvement funding. And an FHA loan’s biggest draw is the very low down payment that is required—sometimes reaching as low as 3.5%.

An FHA loan is advantageous for many home buyers, however, prospective borrowers should bear in mind that the FHA is not there solely for his or her benefit. The FHA also needs to find a way to guarantee that it does not end up footing the bill for just about any delinquent or erring on the borrowers part. Thus, the agency resorts to charging home buyers a fee known as a mortgage insurance premium (usually 1% only), that is paid at the onset and another small fee that is paid monthly.

The FHA then utilizes these premiums and fees as a fund to cover for mortgages that need to be paid off.

Home buyers must study first whether or not they are better off with FHA loans. If they can find lower mortgage insurance premiums being offered by other Chicago lenders and their financial situation can handle the monthly payments, then they are well-advised to go for what is most advantageous for them.

It must be stressed here that an FHA loan is not really for everybody; it depends on the individual’s particular financial situation.