Like HUD loans, FHA loans are normal loans between borrowers and lenders that are backed by the US government. Unlike HUD loans, FHA loans are available to all borrowers that have a below-average credit score that still sits above 500. The typical FHA loan is designed for borrowers with a credit score of at least 580, but little cash upfront to put on a down payment. The structure of an FHA loan is that a down payment of only 3.5% is required if your credit score is 580 or higher, or a down payment of 10% if your credit score is between 500 and 579. FHA loans also vary from conventional loans in the sense that they can be transferrable if the person with the original FHA loan was to sell the property. In the sale of the property, the buyer can show that they are eligible for the FHA loan, and if they are, the seller is relieved of all liability. FHA loans, similar to HUD loans, require a mortgage insurance premium which makes the loan more expensive for the borrower. Because of this added expense, it is not uncommon to see borrowers refinance their mortgage to a more conventional mortgage once they are able to improve their credit ratings. For a borrower to be approved for an FHA loan, the FHA sends an appraiser to ensure that the property meets some minimum requirements. The property must be the primary residence of the borrower, must protect the health and safety of all occupants, must protect the security of the property, and should not have physical deficiencies or conditions which affect its structural integrity.
Problems with HUD and FHA Loans
Though the loans differ in many ways, both HUD and FHA loans have similar problems that come with them. Because of the nature of the loans being to less reliable borrowers, mortgage insurance premiums and higher interest rates are common. These premiums make these loans more expensive than traditional mortgages and thus can make it harder for the borrowers to pay it back. The higher interest rates, which occurs only in FHA loans, can also make the loan more expensive for the borrower than a traditional loan. Other issues with the FHA loans are that they are not allowed to be used for second homes or investment properties. Lastly, though they are easier to get than traditional mortgage loans, borrowers still must ensure that the property they are looking to buy must qualify under the FHA loan requirements. These requirements can restrict the borrowers from buying the property they want or can afford, even with the loan.
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