Trying to find a choice between FHA loans and regular mortgage loans can be a difficult job. However, understanding their applicability, interest rates and other factors can help you choose the right one. But before that it is very important to understand what an FHA loan means. Taking a loan is altogether a big challenge so, it is very important to choose the right alternative to it. Specially when you are trying to buy a house using the FHA Home loan, it is important to understand it rightly and then only make a technically fair choice.
So, let’s start with understanding about these loans and why one is cheaper as compared to the other.
What is FHA loan?
FHA loans stand for Federal Housing Administration loan offer by the US government. Insured by the government of USA, under this loan facility borrowers need to qualify as per the terms set for a loan grant. Once the terms and conditions are fulfilled, the borrower is eligible to gain the loan benefits from the lenders. First time house buyers are however, given preference under this loan facility. With this, as a first time home buyer, there are fair chances for you to qualify if your credit score matches the standards. This loan facility is specially designed keeping in mind the lower and middle-income groups. The idea is to help them become a home owner by lending a limited loan amount for the similar purpose.
How FHA loans are less costly as compared to regular mortgage loans?
No matter whether you are looking for a home loans, comparing your regular mortgage loans to FHA loans is always better. Here are a few points to justify how FHA loans are less costly than regular mortgage loans-
Owned by the Federal government
Conventional mortgage loans are ruled by banks, credit unions, and other savings and loan associations which means the rate of interest of the lending body might differ. It will solely depend on the ruling body. Most of the times, the interest rates defined are higher as compared to the FHA loans. Being ruled under the Federal government, random rates cannot be chosen which makes it a better option to choose while opting for a home loan.
Low down payments
Under loans granted by FHA, only 3.5% of down payment is required if your credit score ranges between 580 or higher and 10% if your credit score ranges between 500-579. This is quite sustainable for an individual trying to purchase a house. However, on the other side, conventional loans facilities require a down payment of at least 20% of the house price along with a borrowing period of 30 years of mortgage. This could be a huge amount of money to invest in initial times and so on.
Low closing cost
The debt to income ratio for an FHA loan is 50% or less however, for the traditional mortgage loans the ratio goes down to 36% which makes it difficult for the borrowers to manage costs. This will automatically increase your monthly costs involved with the loan settling process.
Lower credit scores for qualifying
The minimum credit score required to qualify for the FHA loansis 500 however, when it comes to regular mortgage loans, they prefer higher credit scores ranging to at least 600 and above. Being private in nature and not backed by the government, their lending rules and qualifying eligibilities are way stricter in comparison to the FHA loans. You also need to submit a valid proof mentioning your cash availability for the down payment. This makes it a big clumsy and costlier.
Facility for PMI
PMI or Mortgage insurance is another way to protect again loan defaults. This facility is easily available with Federal Housing Administration loanat the rate of 2.25% of the loan’s value which stands mandatory with this loan scheme. However, for the regular loan schemes, PMI with less than 20% down payment is available which can be cancelled at any time as soon as the borrowers ownership is reached to 80% of the loan to value ratio.
Once these points are clear in a borrowers mind, they ca opt for either of the loan schemes to buy their dream home. FHA loans are however, recommended on a higher scale due to their affordability and low involved costs. There are multiple factors that make this loan scheme cheaper as compared to other regular loan facilities. Right form government backed support to lower credit score, there is a lot to consider this kind of loan facility rather than opting for a regular mortgage loan. Once you are clear in your mind, you can opt for any of these schemes based on your income and need.
