Are you thinking about buying a home, but you’re concerned about your credit or how much you’ve saved? A Federal Housing Authority (FHA) Loan – a home loan insured by the federal government that protects lenders from financial risk – might be an option for you. Conventional loans generally require a higher credit score and a minimum down payment of 5 percent of the purchase price, but FHA loans often have more favorable terms.
FHA loans are worth investigating because they may require a lower credit score to qualify and a smaller down payment. This makes them attractive for first time home buyers or individuals who have less-than-perfect credit. Even if you’ve gone through bankruptcy that has hindered your ability to qualify for traditional loans, you could still qualify for an FHA mortgage only two years after it has been discharged. FHA loans offer these benefits:

Benefit 1: Low down payment

If you haven’t saved a large amount for your down payment, an FHA loan requires a much smaller down payment, typically 3.5%, than a conventional mortgage, depending on your credit score. Conventional or other loan programs can require a larger down payment, or a higher credit score may be required to get that smaller down payment.

Benefit 2: Less cash to close

You don’t need as much cash on hand when applying for an FHA loan, and relief comes in several ways. Home sellers can help pay closing costs (up to 6 percent!) and borrowers can receive up to 100 percent of their down payment as a gift. There are also down payment assistance programs and grants that can help with this cost.

Benefit 3: Future refinancing may be far easier

If you ever need to refinance or get cash out of your home, subsequent refinancing can be far easier and more lenient than with conventional loans. FHA will permit a rate term refinance up to 97.75% of the property value and 85% for cash out refinances of single family residences.

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Every person’s financial situation is different. It’s important for borrowers to shop around when looking for an FHA loan – the interest rates, fees, services and underwriting standards are different, even for the same loan. Because the FHA is not a lender, only the insurer, you must get your loan through an FHA-approved lender.