Understanding Loan Terms

How FHA Loans Are Different from Conventional Loans

20 July 2018

Stanley Simmons

If you are not able to qualify for a conventional loan, you may be able to qualify for an FHA loan with a credit score as low as 500. You will also not have to sacrifice as much flexibility as you think. While you cannot have a short-term loan that lasts 10 years, you have the option of a loan that lasts 15 or 30 years.

Variable Loans Aren't an Option

One option you don't have under an FHA loan is a variable rate. However, you may want to avoid this type of loan because the minimum monthly payments you are expected to pay fluctuate. With a fixed interest rate, you will know exactly what you will always owe. If the interest rates are low but are about to increase, you will benefit from locking in a fixed interest rate.

Down Payments are Surprisingly Low

You may be used to the idea that you need a 20% down payment to qualify for a home loan. But with an FHA loan, you may be offered a loan with a down payment as low as 3.5%. You may have become used to the idea that you won't be able to receive a home mortgage, but FHA lenders are much more willing to work with you. The biggest obstacles are that you must not have filed for bankruptcy in the past two years and you must not have been foreclosed on in the past three years.

There is a Cap On Your Loan Amount

FHA loans are ideal for those who are not looking for an expensive house. There is a cap on how much you can borrow. If your dream is to someday live in a bigger, more expensive loan, this may be a stepping stone that could help you rebuild your credit as long as you make mortgage payments on time.

You Must Forever Pay Your Insurance Premium

If you would no longer like to pay a premium for your mortgage insurance, you will only have this option with a conventional loan after you have paid a certain percentage of your loan off. With an FHA loan, the insurance program remains with you for the life of the loan. However, if you have the means, you may later decide to refinance out of a mortgage loan.

One of the primary goals of FHA loans is to help those in disadvantaged areas qualify for loans. If you fall into this category, this type of loan might be for you.

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About Me

When was the last time you realized you were in the red financially? Although most people don't think about their finances on a day to day basis, it can be easy to find yourself living paycheck to paycheck if you aren't careful. I began thinking carefully about the financial implications of some life decisions I was making, and I knew I had to make a difference. I talked with a loan officer about getting things together, and he was instrumental in helping me to work things out. Read more about my financial successes and failures on this little website. You might be able to avoid some of my previous mistakes.