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FHA Loan: Advantages & Disadvantages

What is an FHA loan?

FHA Loan is a mortgage loan that is provided by FHA-approved lenders. The Federal Housing Administration (FHA) insures the loans that they offer which serves to protect the lender in case the borrower defaults on the loan. This insurance makes an FHA loan less risky for lenders, which in turn helps them to offer better or lower interest rates. The down payment for these home loans is determined by the credit score of the borrower. If the borrower’s credit score is 580 or above, the down payment equals 3.5 percent of the loan value. If his credit score is lower than 580, the down payment increases to 10 percent. The FHA also requires at least one year with no delinquent rent or mortgage payments prior to the loan application.

FHA Loan Advantages:

Only needing 3.5 percent for a down payment can be the difference between getting a home loan and not getting one. Many people with relatively low incomes have a difficult time coming up with 10 percent of the loan value to be used as a down payment. Also, in general, FHA loans have fewer strict requirements in regards to credit and income as compared to other loan products. Refinancing an FHA loan is also great because you can go up to 97% on a streamlined refinance option. Because the loan is insured by the government, lenders are more willing to work with this type of loan.

FHA Loan Disadvantages:

With this type of loan, the borrower must use the loan to finance their primary residence. Mortgage insurance premiums are required up front in addition to the monthly mortgage insurance costs that are required for this loan. If your credit score is low, you will still need the 10 percent down payment in order to get the loan, but your income must also be low enough for you to qualify.