An FHA loan, insured by the Federal Housing Administration, is a government-supported mortgage. Although it’s open to any applicant, its conception was primarily to aid lower-income individuals in procuring a mortgage.
They provide a safety net for lenders against defaults, thus making the terms of an FHA loan generally more favorable than conventional loans. Key features of FHA loans include:
- Lower upfront costs: The down payments required can be as meager as 3.5% of the total purchase price.
- Reduced closing expenses: These can even be incorporated into the loan itself thanks to the flexibility of FHA loans.
- Accommodative credit score requirements: You may be eligible for the minimum down-payment with a credit score starting from just 580.
Moreover, FHA loans offer additional advantages:
- They’re transferable
- Absence of prepayment penalties allows borrowers to settle the loan at their convenience
However, some disadvantages accompany FHA loans:
- Mandatory Mortgage insurance premiums if your loan-to-value (LTV) ratio falls below 95%. This contrasts with conventional loans that demand mortgage insurance only when the LTV surpasses 80%.
- Caps on loan amounts: The maximum amount that can be borrowed is dependent on your intended place of residence, though it usually sets at $625,500.