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Why the FHA Home Loan is the Best Option for You

FHA Loan
In: Business

Are you looking to buy a home in the near future? If so, you probably already know that there are several different types of loans available to help you finance your purchase. In order to decide which loan is best for you, though, it’s important to understand the pros and cons of each one, as well as how much money each type requires upfront. This article will explain why the FHA home loan in South Lyon MI, or Federal Housing Administration loan, should be your first choice when buying your new home.

What is an FHA loan?

An FHA loan (or, Federal Housing Administration loan) is a home financing option that allows you to borrow more money than a traditional mortgage would allow. While traditional loans use your credit score and debt-to-income ratio as a means of deciding how much you can borrow, FHA loans let you borrow more by factoring in your lower down payment and higher credit scores. For example, someone with an annual income of $50,000 and excellent credit could qualify for an FHA loan that allows him or her to purchase a $300,000 home. That’s possible because he or she only needs to put down 3.5 percent on a 30-year fixed-rate mortgage with an interest rate of 5 percent.

Minimum down payment amounts

one thing that makes an FHA loan so attractive to many borrowers is its low-down-payment requirement. The minimum down payment on an FHA loan in Farmington MI varies by county and by the lender, but in most cases, you can get approved with just 3.5 percent or even less of your own cash upfront. For example, if you’re buying a $300,000 home in San Francisco County, California (or anywhere in Alameda County), your minimum down payment will be about $9,100—and that includes a one-time upfront mortgage insurance premium of 1.75 percent ($4,225). In contrast, conventional loans typically require 20 percent or more to qualify for financing.

Mortgage insurance premiums

Not all home loans require private mortgage insurance, also known as PMI. But if you’re getting an FHA loan—which lets more borrowers qualify for a home loan with lower down payments—PMI isn’t optional. It’s added on to your monthly payment and can vary based on credit score, loan amount and other factors. The good news: An FHA home loan comes with several perks designed to offset those costs, including streamlined paperwork and an escrow account that helps pay your property taxes and homeowners insurance. On top of that, though you’ll have PMI throughout your loan term, once you sell or refinance your home—or reach 20% equity in it—you won’t need it anymore.

Repayment flexibility

If you’re self-employed or plan to start a business on your property, an FHA loan could be a good fit. If you have consistent income but fluctuating expenses, then an option-adjustable-rate mortgage might be ideal for you. The FHA also offers many different programs to help borrowers qualify more easily, so you can get a home loan even if your credit isn’t perfect. Still not sure what type of home loan best suits your needs? Contact a certified VA lender to determine which loan option will work best with your financial and personal situation.

Low closing costs

The low-down payment and mortgage insurance help save you money on closing costs. With most conventional loans, a 20% down payment is required. On top of that, mortgage insurance can cost up to 1% of your total loan amount every year. If you want to purchase a $300,000 home with a 20% down payment, your closing costs could end up being $30,000 just in principal and interest payments — not even counting property taxes or homeowner’s insurance! That’s why FHA loans are ideal: they help make homeownership accessible to more people by reducing their required down payment to as little as 3.5%. What’s more: there are no monthly mortgage insurance premiums with an FHA loan!

Who should NOT get an FHA loan?

The FHA finance in Dearborn MI was created with first-time homebuyers in mind, though you can also use it to refinance your existing mortgage. With an FHA loan, you pay a low mortgage insurance premium upfront; as long as you’re not delinquent on your monthly payments, there are no more out-of-pocket expenses once that’s paid off. However, because it’s such a good deal and risk profile, there are some situations in which it makes more sense to consider something else. For example: if you have a down payment above 3% (but below 20%), you might be better off considering a Fannie Mae or Freddie Mac loan.

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