Understanding FHA Loans

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posted 5/7/2013 in Realtor News

If homebuyers are looking to buy their first home, then they owe it to themselves to check out the loans offered by the Federal Housing Administration (FHA). These loans can offer significant benefits designed to help achieve the dream of owning their own home. Designed with first-time homebuyers in mind, the FHA has designed these loans not only to be competitive in the mortgage marketplace, but also easier for homebuyers to qualify for if they are having problems getting a loan on terms they can live with.

The FHA offers several types of loans; these include traditional fixed rate loans as well as adjustable rate loans. One of the benefits of an FHA adjustable rate mortgage is they guarantee the interest rate on the loan, will only change at most by one or two percentage points - no sudden surprises and massive jumps that may knock homebuyers off balance financially.

Another big benefit of FHA loans is that they typically don't require as large of a down payment as a conventional mortgage loan would. They also offer loans to those whose credit may otherwise disqualify them for a conventional mortgage. In addition, the interest on an FHA loan is typically lower for those with less than perfect credit than it would be through a conventional loan program.

It is important to know that the FHA itself does not lend the money for the home and it does not set the interest rates on the loans. The FHA is actually insuring the loan they are getting from a traditional lender.
They are guaranteeing if they default, they will pay for the loan. FHA-approved lenders therefore typically offer loans with better interest rates and less of a down payment because they are guaranteed they will get their money back no matter what may happen in the future.

One easy way for most people to understand how the FHA works is by thinking back to when they were in college. If you took out a student loan while in college it was guaranteed by the federal government that they would step in and repay it should you default on the loan. As such, interest rates were typically low and standard across the board and the loans were available to everyone regardless of their credit history. The same holds true with FHA backed loans, except there is no guarantee on interest - it is up to them to still make sure they are getting the best deal out there.

If you have a first time homebuyer with limited amounts of funds to put towards their purchase, or if they have had credit problems in the past, they may find that an FHA loan gives them the freedom and flexibility they need to get into a house and start making it a home for their family.