Home shopping stirs up a whirlwind of emotions for most would-be homeowners. Exploring different neighborhoods, floor plans, and amenities provides an exhilarating emotional high, but questions about financing could leave some a bit tentative.
If you’re concerned about qualifying for a loan or wonder if you have enough for a down payment, an FHA loan may be worth considering.
What is an FHA Loan?
A Federal Housing Administration (FHA) loan, insured by the federal government, has less restrictive financial requirements. That means borrowers with lower credit scores and down payments may qualify. You can also use gifted funds to help with the down payment if you need to.
FHA Loan Advantages
As a potential home buyer, if FHA loans can help overcome these types of roadblocks. A large down payment is also unnecessary since an FHA loan allows a consumer to purchase a home with as little as 3.5% down.
Ways to Use an FHA Loan
An FHA loan allows you to achieve a variety of financial goals that go beyond just purchasing a new home. For example, you may use an FHA loan to refinance an existing mortgage if your credit score might interfere with your ability to qualify for a traditional refinance. Saving interest or reducing your current monthly payment may be possible when you use the new loan to pay off a higher interest rate loan, extend your mortgage repayment terms, or both. But because FHA loans have upfront and monthly mortgage insurance premiums for the life of the loan, a conventional loan may be a better option to explore.
An FHA loan may also offer additional benefits unavailable with traditional refinance options, such as lower mortgage insurance premium payments for some borrowers and less paperwork to be approved since you have previously qualified for an FHA loan.
Like other mortgage loans, refinancing an FHA loan can provide you with cash back at closing. Borrowers can use these excess funds to pay off debts, cover medical expenses, or fill another financial gap.
While FHA loans help provide a pathway to homeownership, keep the following in mind as you consider whether an FHA loan is right for you. Besides meeting financial requirements, applicants must purchase a primary residence. An FHA loan isn’t intended for borrowers purchasing a vacation home or investment property. There are also minimum and maximum amounts you are able to borrow that change annually. Homebuyers are still responsible for closing costs that average 3% to 4% of the home’s price. Similar to the private mortgage insurance required on some conventional loans, FHA loans include upfront and monthly mortgage insurance premiums to protect the lender against loss should you default on your payments.
Discuss Home Loans With Our Experts
Learn more about our home loan options.1 Our loan consultants will be happy to discuss one that may be right for you.
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Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or GreenPath Financial advisor who can help tailor a solution for you.