Are you a first time home buyer? You might have heard about FHA loans.
An FHA loan is what you need if you do not have enough cash to drop a 20% down payment on a home mortgage. FHA, or Federal Housing Administration, was created in 1934 by the US Congress to help people be eligible for a home loan even if they have low income.
FHA loans aren't exactly mortgages as the FHA won't be the one to lend you the money to buy a home. FHA loans act as insurance on the loans given by FHA approved lenders. So, technically, there will still be a lender involved, only that FHA insures your loan so the lender's risk is reduced. To cut to the chase, FHA will pay the lender if the borrower fails to pursue paying the loan.
Sounds great right? However, there are also disadvantages to getting an FHA loan. Although it's great that you are saved from the standard 20% down payment and FHA offers a loan for as low as 3.5% down payment, this would generally mean that you will pay higher interests compared to conventional loans. You would also be required to pay for the mortgage insurance premiums which have two kinds - an upfront mortgage insurance premium (1.75%), and an annual mortgage insurance premium that is paid monthly.
Technically, those are the major drawbacks of a lower down payment. If you don't mind paying higher interests just to own your first home, an FHA loan is the best option. This is a great step for college students and newly weds who want to own their first home but do not have enough extra cash for a large down payment.
As a general piece of advice, only take FHA loans if you really do not have enough money for a 20% down payment, because if you actually have enough cash, you can save a lot on interest if you provide a larger down payment.
