Let’s start off with the basics.  What exactly is an FHA loan?  It is a government insured loan that allows for higher loan limits, lower home prices, and a low down payment.  FHA loans used to be hard to get and therefore not very popular, but today FHA loans make up almost 50% of the home loan market.  Stricter guidelines for conventional loans, such as higher credit scores and higher down payments, is one of the reasons FHA loans have become so popular.  If you are planning to purchase a new home and considering using an FHA loan, here are five things you should know about them.

1. Go to an FHA approved lender.  Go talk to a lender that knows what they are talking about.  You want someone that knows the ins and outs of the program, and will be able to explain the benefits of the program to you and how it works.  To find an FHA lender in your area, please visit this link. https://www.hud.gov/program_offices/housing/sfh/lender/lenderlist

2. Expect a low down payment.  This is the appeal of the FHA loan.  The minimum required down payment is only 3.5 percent and you can get the funds for the down payment as a gift.  The gift can come from an “approvable source”, such as family members, employers, or a down payment assistance program.  This aspect makes the FHA loan very appealing to someone who is low on cash, but wants to purchase a home.  

3. More favorable terms.  The FHA loan is insured by the government, so there is less risk involved for lenders.  Because of this, lenders are more willing to be flexible when qualifying borrowers for what they can afford.  The qualifying ratios used are also more lenient than traditional ratios, with 31 percent on the front end and 43 percent on the back end.  

4. This is a great loan for first-time home buyers. This is a great loan option for first-time home buyers because of the less strict requirements and because it allows for a non-occupant cosigner.  This means that someone that will not be occupying the property can cosign on the loan to help the original borrower qualify.  Then, when the original borrower is in a better financial situation, they can assume the loan without having to refinance it.  This is a huge win for those looking to purchase their first home.

5. Sellers can contribute to closing costs. With FHA loans, sellers can contribute up to 6 percent of the purchase price in closing costs.  This is a huge incentive as well for buyers that might be short on cash, because you probably won’t have to pay all the closing costs yourself.  In a traditional conventional loan, sellers can only contribute up to 3 percent.  Yet another incentive to use an FHA loan!