What Is the Benefit of an FHA Mortgage Loan?

FHA loans can help first-time homebuyers secure lower interest rates on their mortgages.

An FHA mortgage loan is a loan with below-market interest rates secured by the Federal Housing Administration and awarded to qualified homebuyers. State and federal governments both administer FHA mortgage loans. In general, to qualify for an FHA-backed mortgage, homebuyers must meet income and purchase price guidelines, and must be first-time homebuyers or must not have owned a home in the last three years.

Interest Rate Benefit

FHA loans are insured by the Federal Housing Administration, meaning lenders will give you better loan terms because there is no risk of the loan company losing money if you default. The result is a lower interest rate that will save the borrower thousands in interest payments over the life of the loan. Furthermore, the down payment required on an FHA mortgage loan is generally less than it would be on a conventional mortgage.

Down Payment Benefit

Many states offer borrowers some form of down payment assistance as a grant or loan. However, these may carry certain restrictions. For example, a common restriction placed on a down payment grant is that the borrower must remain in her home for a set number of years. If she sells her house before that time has passed, she may need to repay the down payment grant awarded when she bought her home.

Fixed-Rate Benefit

All FHA mortgage loans carry fixed interest rates. In a fixed-rate mortgage, you have the same interest rate for the life of the loan. You will have amortized payments. This means the lender will determine your fixed monthly payment by taking the total of the mortgage and all interest charged over the life of the loan and divide it by the number of payments you will make. This benefits homeowners because, unlike fluctuations in property taxes and homeowner's insurance, monthly mortgage payments will not change.

Limitations

Borrowers who have filed bankruptcy cannot qualify for FHA loans until clearing their bankruptcy for two years. Additionally, borrowers must meet income requirements to qualify for an FHA loan, though these requirements will vary by state. Purchase price limits will also vary from county to county depending on the cost of living where you purchase the home.

More Information

The U.S. Department of Housing and Urban Development (HUD) maintains information on all government-offered FHA loans. However, many companies and non-profit agencies also offer comparable loans in specific communities. These companies will secure the loans they award so first-time homebuyers can receive favorable interest rates and loan terms. Your local HUD office can tell you whether such opportunities exist in your community.

References

• U.S. Department of Housing and Urban Development: Let FHA Loans Help You