An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA). These loans are typically popular for first time home buyers given that they allow a down payment of 3.5% with a credit score as low as 500. FHA Loans are designed for low to moderate income borrowers who cannot afford a large down payment.
Since 2018, a borrower can borrow up to 96.5% of the total value of the home, if their credit score is at least 580. If the score is below a 580, a 10% down payment of the value of the home is required. However, 3.5% of the down payment may come from a grant or gift.
During the 1930s, FHA Loans were introduced as a result of the Great Depression. During this time, foreclosures were escalating and the government needed to create a solution for the defaulting housing market. Federal mortgages were introduced to allow potential home buyers the ability to purchase a home they otherwise would not qualify for through existing loans. Prior to FHA loans, most loans were short-term, lasting between three to five years.
The Federal Housing Administration was created as part of the National Housing Act of 1934, which was designed to stop bank foreclosures on family homes. Its primary goal was to regulate the interest and terms of mortgages. As a result, these new practices increased the number of people who could afford a down payment as well as a monthly payment to their lender. Since 1934, the FHA has insured over 34 million home mortgages and counting.
Since FHA loans are designed for low-income individuals with a 500 or below credit score, most first-time buyers or those without a credit score have no problems qualifying for an FHA loan.
Since the Great Depression, FHA mortgages have had success among first time buyers considering most have a small amount of cash, equity, or low credit score. In 2018, first-time buyers are still reaping the same benefits. While there are substantial reasons to consider applying for this type of loan, there are a number of benefits and drawbacks to consider.
These are the primary benefits:
Now for some drawbacks:
If you’re a first-time buyer, have a low credit score, and can only afford a small down payment, then an FHA loan may be right for you. Homeownership can help you avoid inflating rent costs and establish a sense of social stability. Down the road, you will be in a much better position having taken this step as opposed to continuing to pay fluctuating rent prices.
My Home Loans in El Paso is committed to finding home buyers the right loan so they can achieve their goal of becoming a homeowner. Please connect with us today if you are interested in learning more about an FHA Loan. We can help answer your initial questions and guide you in the right direction.