OakStar Bank Explains the FHA Loan

OakStar Bank: What is an FHA Loan?

If you are looking to buy a home, you will first need to secure a loan. To secure a loan, you have to qualify that loan via your credit score. Home buying for people lacking a great credit score can be difficult and stressful, especially for first-time home buyers. Part of President Roosevelt’s “New Deal” program was the Federal Housing Administration, which was formed to help revive the country after the Great Depression. A key component of the FHA is FHA loans, which insures loans given to low- and middle-income borrowers. In today’s blog, David Jacobson at OakStar Bank would like to take some time to explain these loans.

How is an FHA Loan Different from a Conventional Loan?

FHA loans were designed to help lower-income borrowers. One misconception is that these loans are given out by the FHA, which isn’t actually true. They are simply loans that are insured by the FHA. Which means that lower-income families are more likely to get approved. Think of this as similar to a co-signer, except the co-signer is the government. If you fail to repay the mortgage, the FHA will step in and repay the bank. This makes lenders more likely to approve loans for lower-income families who would ordinarily be risky.

That is not the case with conventional loans. Conventional loans are not guaranteed by the government, so lenders are going to be less likely to lend to low-income borrowers, especially if their credit is sparkling. However, because an FHA loan is essentially just insurance on a regular home loan, that means that borrowers have to pay insurance premiums. This is the downside to these loans. Since they are guaranteed, you are much more likely to get approved with poor credit or a lower income. However, you will have to pay an upfront mortgage insurance premium as well as ongoing premiums.

Should I Apply for an FHA Loan?

This question depends on several factors. First, what is your family income? If you are making 50-60,000 per year or more, you should consider a conventional loan, especially if you have good credit. Which leads to the second question: what is your credit status? The minimum credit score for FHA loans is lower than that of a conventional and can drop even lower if you are willing to pay more for the down payment, likely closer to 10%.

If you are a lower-income family, which is roughly $47,000 for a family of four, and don’t have great credit, an FHA loan is likely the way to go. However, there are no income limits for these loans, so even if you have a higher income, you can still qualify. If you aren’t sure what you can afford, try our mortgage calculator to help you gauge your price range.

Still Not Sure? Talk to David Jacobson at OakStar Bank

Applying and securing a loan is stressful. We get it. We have been there. That’s why we want to help. If you want to know more about FHA loans or just about home loans in general, contact us today at (417) 830-7300 or visit our website.

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