Confused about all of the loan options out there? Wondering what is a FHA loan? You’re not alone.
An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. Borrowers who take out FHA loans are required to pay for mortgage insurance, which protects the lender in case the borrow defaults on the loan. For this reason, lenders often offer FHA loans at very attractive interest rates, with lower down payments (sometimes as little as 3.5%) with less stringent and more flexible qualification requirements such as lower credit scores. In fact, FHA is the most lenient on credit scores and a buyer may be preapproved at a credit score of 580.
A lot of buyers assume that conventional interest rates are “better than all the rest” but that isn’t really true. On conventional loans you typically have to maintain mortgage insurance for the bank (remember, mortgage insurance protects the bank, not you, but you still get the privilege of paying for it) but once your loan has achieved 20% of it’s principal pay down, you can apply to have the mortgage insurance requirement removed. With an FHA loan, you are paying mortgage insurance to protect the bank in the event of foreclosure for the entire life of the loan.