FHA home loans are a popular financing strategy for home buyers.
They´re especially popular with first-time buyers who don´t have much of
a down payment saved up. But FHA loans are also commonly misunderstood.
Here are some of the biggest misconceptions about these loans.
But first, a quick definition. An FHA loan
is simply a mortgage loan that´s insured by the Federal Housing
Administration. The FHA is part of the Department of Housing and Urban
Development, better known as HUD. This government agency insures
mortgage lenders against losses resulting from borrower default. This
makes the lenders more inclined to use the program, and to give loans to
people who might not otherwise qualify for a mortgage.
Myth #1: Anyone can qualify for an FHA loan.
Truth: Not everyone will qualify. Generally
speaking, it´s easier to qualify for an FHA home loan than a
conventional mortgage loan. But that doesn´t mean they´re available to everyone. In fact, the Department of Housing and Urban Development (HUD) has recently tightened up
their lending standards for FHA loans. One of the changes affects
people with low credit scores. If your credit score is below 580, you´ll
have to make a larger down payment. If your score is way below
580, you probably won´t get approved for the loan. With good credit,
you´ll still have to make a down payment of at least 3.5% to get
approved. You´ll also need to document your income and expenses, to show
that you can afford the monthly payments.
Myth #2: You can get an FHA loan with no money down.
Truth: In the current economy, you can´t get any
kind of loan without making a down payment of some kind. The days of
"easy credit" and "no money down" disappeared when the housing bubble
burst. The minimum down payment for an FHA loan is currently 3.5%. And,
as mentioned earlier, you´ll need a credit score of 580 or higher to
qualify for the 3.5% down payment. If your score falls below that cutoff
point, you´ll have to put 10% down.
Myth #3: FHA loans are safer, because the government will bail you out if you fall behind.
Truth: Wishful thinking. If you fall behind on an
FHA home loan, you can be foreclosed upon - the same as any other type
of loan. Remember, the FHA is not the one giving you the money. You must
apply for one of these mortgages through an FHA-approved lender.
The government just insures the lender against losses resulting from
borrower default. So the lender can still foreclose on you, if you fail
to make your payments. As an FHA borrower, you might have more workout
solutions and modification options available, but that´s about it. The
FHA will not "bail you out." So make sure you buy an affordable house!
Where to learn more:
Federally insured loans offer certain advantages to home buyers. But
they are not a risk-free path to homeownership. As a borrower, you are
still responsible for making your payments on time. If you would like to
learn more about FHA loans and how they work, refer to the resource
links provided above.
Citation Note: The original version of this article
was written by Brandon Cornett. Brandon is the publisher of the Home
Buying Institute, which includes one of the largest libraries of credit advice for home buyers.