If you are a first time homebuyer, you may have heard of the Federal Housing Administration (FHA). But what exactly is it and how can it help you purchase your first home? The Federal Housing Administration insures mortgages so that lenders can offer more favorable terms to borrowers with less money to put down. In some cases, you can get a home with as little as 3.5% down. Let's take a closer look at the FHA and see how it might benefit you as a first time home buyer.
The History of the FHA
The Federal Housing Administration was created in 1934 in response to the Great Depression, when lending standards had become too strict for people to obtain financing for their homes. The idea behind the Federal Housing Administration was that by making mortgage loans more accessible and affordable, more people would be able to buy homes. Since then, the Federal Housing Administration has insured millions of mortgages and helped many Americans become homeowners.
How Does It Work?
When you apply for an FHA loan, your lender will submit your loan application to the FHA for approval. If your loan is approved, the FHA will provide insurance on your loan up to a certain amount. If you default on your loan, the lender will not have to bear all of the costs associated. Instead, they will be reimbursed by the FHA for any losses incurred. As long as you make your payments on time each month this insurance should never come into play.
Benefits of an FHA Loan
The primary benefit of an FHA loan is that it requires much less money down than traditional loans do. In some cases just 3.5%. Making it easier for lower-income borrowers with a smaller down payment to get approved. Because these loans are insured by the government, lenders are often willing to offer more favorable terms. Such as lower interest rates and smaller monthly payments than they would with other types of loans.
If you're looking to purchase your first home but don't have enough saved up yet for a large down payment or perfect credit score required by most traditional lenders, then an FHA loan may be right for you. Thanks to its low down payment requirement and government backing, an FHA loan could help make buying a home significantly easier for first time buyers who don't quite meet traditional lending standards yet but still want to become homeowners someday soon!