Get the government patronage with FHA home loans

The Federal Housing Administration (FHA) is a new kind of mortgage loan. This gives the money lender a sigh of relief because the risk of non repayment by the borrower is covered by the government. The government gives the amount from the public fund which will reduce the burden of the money lender who will otherwise be a loser. If you are interested in this kind of loans go ahead with the article.

This article covers

• What are FHA Home Loans?
• Whom it is meant for?
• What are the types in it?

You have just spent hundreds of hours doing research for your new home, and now you have a new dilemma. A lot of friends are talking about FHA loans. What in heaven is that? It sounds like the acronym of some unknown and strange government agency. Don't worry, you don't have to spend days trying to find what a FHA mortgage is. Let's find out.

Everything started in the 1930's, during the Great Depression. Unemployment rose as high as 25%, so it is obvious that many people were not able to pay a mortgage. Trying to correct this situation, the government took action and, through the Federal Housing Administration (FHA), it created a new kind of mortgage loan, the FHA home loan.

The premise is that the government insures the FHA mortgages. That way, if the mortgage lender doesn't receive his payment, the government will cover it from a public fund. As a direct consequence, the lender's risk is eliminated. That way he can reduce his mortgage rate and offer interesting (and low) monthly quotas.

FOR WHOM IT IS USEFUL?

Low-income citizen cannot use traditional mortgage loans. Financial institutes won't risk their money for someone who they don't trust. But, if the government is willing to backup that person, they will happily help. It's the final guarantee they need to start trusting you.

WHAT ARE PROS AND CONS?

Let's check some basic numbers. First of all, FHA home loans let you buy a property with less than 3 % of the down payment. That's nice. Second, your monthly housing cost can't exceed 29% you gross monthly income. Is that an advantage? Sure. They are doing it for protecting you against debts you won't be able to pay.

What about the disadvantages of applying to a FHA home loan? There must be at least one. Well, first of all, it depends of where you live. Unfortunately, each state, county and city have different regulations regarding the loan amounts for which you can apply. That means that you will have to do some research on your local FHA regulations to find the limits. And second, you will need a mortgage insurance premium (MIP) for FHA, which are higher than the ones paid in regular mortgage loans.

CAN I APPLY?

Sounds great, doesn't it? Where do you sign? Well, as every financial instrument, there are some prerequisites. First of all, you need a credit background. The government doesn't like to give away money for free. If you want them to cover any payment mishap, you first need to assure them that you pay your bills. Second, you need to have enough cash in your bank account to close the loan. And third, you need to earn enough money to pay the monthly mortgage payments.

If you are an average American looking for your first home, the FHA loan requirements won't be a problem. As you can see, FHA loans are much easier to comply than the average requirements asked by mortgage providers.

What are the Interest Rates of FHA?

There are two types of interest rates. The first one is the fixed rate interest. It means that you will comply with an unchangeable rate during the period of the mortgage. Within this kind of interest rate, you can apply to a 30 year term or to a 15 year term. At this moment, the FHA fixed interest rate is 5.984% and 5.683% for a 30 or 15 year term, respectively.

The other type of interest rate is the FHA Adjustable Rate Mortgage (ARM). The difference with the fixed rate is that your monthly payments vary depending on the fluctuations of the interest rate. Some months it can be very high, on others it can be very low. If you wish to use this option, it is recommended to consider your monthly income and analyze if you will be able to pay the high peak months.

Continue to: Types of FHA Home Loan