When people are looking to purchase a home, financing is one of their biggest concerns. Let's discuss FHA loans, it is one of many available, but serves a specific purpose that may fit you needs.

FHA Loans

This loan is insured by the Federal Housing Authority, hence the name FHA. This insurance enables lenders to approve mortgages that do not meet those required on traditional loans.

However, the key here is this loan is only for owner occupants. You must live in the home to get this loan (at least until you refinance out into a traditional loan).

Some of the benefits to FHA Loans

Small down payment:

As little as 3.5% can be put down on a property. This makes it much easier for people to come up with the money to get into a home. Furthermore, that down payment can be received as a gift.

Say, a relative wants to provide the 7k down payment needed for a 200k home purchase. That can be done as a gift and is below the IRS gift threshold of 14k per year, making it a simple non-taxable transaction.

Sellers can contribute more to closing costs

If you negotiate with the seller to pay some closing costs, it is capped at 3% of the purchase price for traditional mortgages. However, with FHA loans it is double at 6%, which opens up the option of the seller paying all the closing costs.

Note: Closing costs usually run around 4-6% of purchase price depending on the state it is located.

Those are just a couple of the benefits of an FHA loan.

Negatives to FHA Loan:

Mortgage Insurance:

Just because the FHA is backing the loan doesn’t mean you will not be paying insurance on it. Basically anytime you put down less than 20% on a property you will be paying for mortgage insurance.

For FHA loans, once you have built 78% equity in your property you can request to stop paying mortgage insurance. FHA loans do require that you pay for five years so even if a mortgage was prepaid down to 78% before then the owner would still pay insurance until five years is complete.

You can see the full article with other pros and cons here: http://scaredycatguide.com/fha-loans-a-quick-and-easy-guide/