3 Popular Types of FHA Loans: How They Work & Who They Benefit
FHA loans are one of the most popular types of mortgage loans in the country. There are over 7.8 million active FHA loans nationwide totaling $1.2 trillion in unpaid principals. If you add up the mortgage premiums owed on these loans, the total amount is astronomical! But what types of FHA loans do homebuyers apply for most often and how do they work?
Here’s a look at how three popular types of FHA loans work and who they benefit.
1. FHA 203(b) Home Loans
How Does It Work?
If you hear someone talking about FHA loans, chances are they’re referring to an FHA 203(b) loan! FHA 203(b) loans are traditional mortgage loans that require the borrower to make a down payment worth at least 3.5% of the value of the property they wish to buy. The remaining cost of the property is then structured into monthly installments, and a premium is charged by the mortgage lender on each payment.
For example, suppose you want to buy a house worth $500,000. If you want to take out an FHA 203(b) loan for this purchase, you’ll be required to pay 3.5% of the property value as a down payment (which equals $175,000). The remaining $325,000 will then be split into monthly payments depending on the loan term and the interest rate you qualify for.
In this scenario, if you qualify for a 15-year loan at 5% APR, you’ll be liable for 15 yearly payments of $21,666.66 plus 5% interest. This amounts to $22,750 per year ($1,895.83 per month).
Who Does it Benefit?
FHA 203(b) home loans only require a 3.5% down payment and a credit score of 580 or higher. Therefore, they’re highly beneficial for first-time homebuyers seeking financial assistance. They also benefit prospective homebuyers who don’t earn a high income.
2. FHA 203(k) Home Loans
How Does It Work?
If you’ve ever wanted to take out a loan to buy and renovate a fixer-upper, FHA 203(k) home loans are for you! This type of home loan works in the same way as an FHA 203(b) loan, but the requirements are slightly different. The total renovation cost on the property must exceed $5,000. Moreover, the value of the property—defined as the appraisal cost of the property plus the renovation cost—must be lower than the FHA mortgage limit in the area.
For example, if you find a $150,000 property that’ll cost $10,000 to fix up, you’re eligible to apply for an FHA 203(k) loan worth $160,000. In this scenario, you’ll owe at least 3.5% upfront and the remainder in monthly installments with interest. The premium on your FHA 203(k) loan will depend on your credit score and how big your down payment is. The more you pay upfront, the lower your premiums will be!
Who Does it Benefit?
FHA 203(k) mortgage loans benefit homebuyers that are experienced in flipping fixer-uppers. If you think you can fix up and sell a property at a higher price than the money spent repaying an FHA 203(k) loan, you’ll end up profiting!
3. Energy-Efficient FHA Loans
How Does It Work?
Energy-efficient FHA loans are designed to help homeowners looking to install energy-efficient fixtures like LED lights and solar panels in their homes. The idea is that the lower a homeowner’s energy bills are, the more funds they’ll have to make mortgage repayments.
For example, suppose you want to buy a home worth $250,000 and renovate it with energy-efficient fixtures worth $20,000. If you take out a 15-year energy-efficient FHA loan at a 5% fixed interest rate, you’ll be required to pay at least 3.5% down of the total cost ($270,000) which amounts to $94,500. If you do the math, you’ll be left owing monthly installments of $1,023.75 (including 5% interest) over the next 15 years.
This might seem like a lot, but if the loan helps you reduce your energy bills by 50%, you’ll be in a far better financial position than if you took out another type of mortgage that didn’t affect your home’s energy consumption!
Who Does it Benefit?
Energy-efficient FHA loans benefit homebuyers who know exactly what kinds of energy-efficient fixtures to install to reduce their home’s energy expenditure. In other words, if you want to make optimal use of an energy-efficient FHA loan, it’s vital to crunch the numbers on your home’s energy consumption.
Ask yourself—how much do you currently pay for energy? How much will you save if you installed energy-efficient fixtures? Will the drop in your energy bills be big enough to offset the premiums owed on an energy-efficient FHA loan? The answers to these questions will help you decide whether an energy-efficient FHA loan benefits you in the long run.
Atlantic Home Capital’s Mortgage Consultants Assist Clients in Applying for All Types of FHA Loans in Farmingville, New York
No matter what type of FHA loans you’re thinking of applying for, hiring a licensed mortgage lender is a great way to maximize your chances of a successful application. That’s where Atlantic Home Capital comes in!
We’re a New York home mortgage lender who considers our clients’ unique circumstances before advising them on what type of FHA loans will suit them. We also issue numerous other mortgage loans like investment property loans for property investors, modular home loans to finance prefabricated home purchases, and VA loans for those working in the armed forces. Additionally, we provide mixed-use financing for those interested in purchasing mixed-use buildings and refinancing services to help our clients obtain better terms on their mortgage loans.
If you’re eager to speak to an experienced mortgage broker in Farmingville NY about applying for any of the FHA loans we’ve discussed in this article, we’re just a quick call away. Dial 631-687-3510 to reach our Farmingville office now or send us a message online to book an appointment today!
