FHA home financing can be one of the best alternatives to homeowners who cannot qualify for a conventional loan. Future homeowners should consider all types of loans before choosing one type, then shop different providers for that loan to get the best terms. Many homebuyers that follow this strategy often decide on an FHA loan as their best option, because of the following benefits.
More Homeowners Qualify for an FHA Loan
Some homeowners choose an FHA loan simply because they are not able to qualify for a conventional loan. One of the primary barriers to qualification is the down payment. Decades ago, conventional loans often required 20% to 30% down payment. Young couples scrimped and saved for years to come up with enough money to make the down payment. As home prices increased at a greater pace than average revenues, the number of couples that qualified began to drop. In order to address this problem, the government created FHA loans. This served to stimulate the housing market, which is a leading economic indicator. With government backing, the requirements for a down payment dropped significantly.
In some ways, conventional loans responded to the growing housing market as well. Homebuyers can find lenders that will offer conventional loans at as low as 5% of the house price. However, these often come with the prerequisite that homebuyers obtain PMI (private mortgage insurance). This has the effect of amortizing a portion of the down payment into the monthly payments.
The Government Assumes a Portion of the Risk
The FHA comes with superior terms because the federal government assumes a portion of the risks. For any financial instrument, the interest rates are in proportion with the risks. The risk which determines the interest rate on a home loan for an individual depends on the state of the economy, the risk factor of homebuyers in general, and the credit history of the individual purchaser. The government assumes a portion of this risk, which lowers FHA interest rates.
For conventional loans, the ability of the homeowner to save a down payment is the leading indicator of the financial ability of that homeowner. The government compensates for the increased risk of a lower down payment as well.
Consider the Increased Regulations for FHA Loans
The government must manage the risks of FHA loans just as banks manage the risk of conventional loans. They do this by imposing more rules and regulations on the homeowner. Although an FHA loan reduces the barrier of a large down payment, the personal qualification requirements are generally much higher. If a homeowner can afford the down payment for either type of loan, then he or she will qualify for the conventional loan much more easily.
FHA loans also contain restrictions on the maintenance of the loan. Homeowners who sell or refinance their homes early on in the term may be surprised with significant penalties. Many of these overcome the benefits of taking an FHA loan in the first place. If a family determines it is unlikely they will keep their home for a period beyond 3-5 years, then they need to do a careful comparison of loans in both the event that they stay in their homes for an extended period and if they do not.
FHA home financing carries significant benefits, but homeowners should carefully compare all of their loan options for their unique financial situation before making a final decision.