Purchasing a home is one of the most important financial steps in your life. The traditional 20% down payment, which is almost always six figures, can be a big challenge to this step. It would be very appealing if the down payment can be lowered to 3.5% and it is possible with a Federal Housing Administration or (FHA) loan. One must first study it well before committing to such loan.
As reported in Mint.com, The FHA loan has been around since 1934, when the U.S. government launched the program to jumpstart a lagging housing market. Since its inception, FHA loans aim to make home ownership more accessible to all Americans by offering low down payments as low as 3.5% and low interest rates for borrowers with low credit scores.
It's a "government-backed" loan, meaning the government insures the mortgages. If a debtor can't repay the loan, the FHA repays the lender. This allows lenders to offer loans to those who might otherwise be denied.
As things don't come without disadvantages, FHA loans already has potential drawbacks. One is the fact that borrowers need to pay a mortgage insurance premium, since FHA provides insurance, although luckily the U.S. government had reduced the MIPS for the first time this year since 2001.
MIPs being the life of an FHA loan has two parts:
- Upfront Mortgage Insurance Premium (UFMIP): UFMIP is paid at the time of closing and is equal to 1.75% of your loan.
- Annual MIP: Your annual insurance rate varies between .7 and .85 percent, based on the length of your loan, the amount you're borrowing, and your initial loan-to-value ratio.
It doesn't necessarily mean that FHA-backed mortgage is better than the conventional type of loan or vice versa. Before getting any type of loan, the borrower must do a thorough inquiry of all loan options. True that an FHA Loan can be a surefire gateway to owning your dream home but it is still important for one to understand what he or she is getting into.
