FHA Loans or Federal Housing Administration Loan is a program by FHA to help people buy their dream homes at lower interest rates. The program highlights are that you can borrow 96.5% of the house cost and pay only 3.5% as a down payment. The credit score required for an FHA loan is also lesser than a standard housing loan. Quite lucrative, isn’t it? So, let’s get to know more about the FHA Loans and how you can get the interest rate lowered if you have one?
What Is an FHA Loan?
The first thing to be clear about is that FHA does not lend you any loans; the FHA-approved lenders will.
The process goes like this- you approach a bank or financial institution for the house loan. This bank or financial body is already approved by FHA. Now you get the loan, and that too at lower interest rates. But now your curiosity kicks in. Why the lower interest rates? It is because FHA guarantees the loan! God forsake, but if you default on the loan, FHA will pay the balance.
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Therefore, the banks and financial bodies can accept lower credit scores and interest rates.
And since the FHA guarantees this loan, this loan is also called FHA insured loan.
But lastly, there is one condition. All those borrowers who qualify for the loan must buy mortgage insurance to get the guarantee of FHA. And the premium payments are made in favor of FHA.
Thus, it is a whole cycle. The FHA gives a guarantee to the banks and secures them. And you pay a premium to FHA to secure them. And as a result of all this give and take, you get low-interest loans and buy your dream home.
What Are The Pros And Cons Of An FHA Loan?
Like the two sides of a coin, even the FHA Loan has its pros and cons. Let’s get a glimpse of both of them. It is always better to make an informed decision.
The Pros Of An FHA Loan
#1: You Require A Lower Credit Score
If you have a credit score that you are not proud of, you can still take a sigh of relief. This program enables you to take a loan even if you have a credit score of 580. But there is hope for those also who have a credit score less than that. People with a credit score between 500 and 579 can still avail of the loan but with a down payment of 10%.
#2: Less Down Payment Required
Yes, as we have already mentioned, you can become the owner of your dream home with as little a down payment as 3.5%!
#3: Lower Interest Rates
Lastly, since this is a government program for helping people buy homes, it has lower interest rates.
So, this program has lower interest rates, lower down payment, and lower credit score requirements. What else do you need? But hang on! Everything has downsides, and so do FHA Loans.
The Cons Of An FHA Loan
#1: You Need To Pay Mortgage Insurance Premiums (MIP)
Yes, this is the only con of the FHA Loans. You need to pay the FHA, the MIPs.
The MIPs comprises two sets- an upfront MIP and an annual MIP.
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You can pay the upfront MIP at the time of closing, or it can be added to your loan amount. In 2020, it used to be 1.75% of the loan amount.
About the annual MIP. It is actually a monthly payment, not annual, and ranges between 0.45% to 1.05%. This rate depends on your tenure, credit score, down payment, etc.; however, the typical rate is 0.85% of the loan amount.
Here is an important note. The FHA loans were quite popular previously but have lost their popularity owing to the increasing MIPs. But according to us, explore both options before you close a deal.
How Can You Get The Interest Rate Lowered If You Have An FHA Loan?
If you now want to convert your loan into an FHA Loan, then here is a series of steps that you can follow and cut on your interest rates!
Step #1: Fulfil All The Requirements
The most important requirement to fulfill here is to pay all your payments on time in the past 12 months. Any payment you may have paid 30 days or later than the due date can cause you trouble.
It would be best if you confirm the above requirements before approaching any financial institution.
Step #2: Approach A Good Lender
The next step is quite obvious. It is time to approach a lender and ask him for quotes. The quotes should contain different interest rates and closing costs.
Step #3: Compare the Quotes!
This step is tricky but very critical. Your efforts on this step will define how much savings you make. Thus compare the quotes. Well, after all, savings were the reason you wanted to switch to an FHA Loan.
Also read: Home Equity line of credit vs Home Equity loan
You will have to incur refinancing costs when you switch to an FHA Loan. Thus compare your monthly EMI payment with your refinancing cost. Calculate how much time you will take to break even and henceforth start making profits.
On average, it takes three years for you to start getting any savings. But do your maths for results are typical to every quote.
Step #4: APPLY!
Now that you have chosen your lender, tenure, etc., it’s time to apply. Provide the lender with all the required documentation when you apply. Now your lender will bring out your credit history and submit it along with other documents to the underwriting. The underwriter might ask you for more documentation which you should promptly provide.
Step #5: Stay In Touch With The Lender
Stay updated with the proceedings by staying in contact with the lender. And when your file is through, the lender will inform you. This is the time you set up closing on the new loan.
In A Nutshell…
According to us, FHA Loans are suitable for those with lower incomes and bad credit scores. But there is no such categorization. We advise that you compare all options and go for the best deal you can find.