The U.S. Department of Housing and Urban Development’s Federal Housing Administration insures home loans made by private lenders. These loans, generally called FHA loans, develop. Before taking out an FHA-insured loan, it is important for consumers to know how they differ from traditional mortgage loans.
HUD vs. Conventional
The most important difference between loans issued via the U.S. Department of Housing and Urban Development, or HUD, and traditional loans issued by private lenders, is that HUD loans are insured by the FHA. This implies that if you default on an FHA-insured loan, the government will pay the creditor the cash it would have otherwise lost. As a result of this, these loans are less risky to lenders. This means that consumers can be charged lower interest rates for HUD loans by lenders. They don’t have to charge higher prices to supply them with increased financial protection.
FHA-insured loans issued by HUD include another main benefit over traditional mortgage loans: They need smaller down payments. Lots of home buyers could afford monthly mortgage payments. They struggle, however, to come up with the down payment dollars that many traditional mortgage lenders need. Lenders vary, but many ask borrowers to get a down payment of 10 percent to 20 percent of a home’s purchase price. For a $200,000 home, that may run from $20,000 to $40,000, a significant quantity of money. FHA-insured loans, however, need just a 3.5 percent down payment. For the same $200,000 loan, then, debtors could only come up with a down payment of $7,000. That is a simpler financial burden to bear.
Reduced Closing Costs
Closing expenses, the fees that traditional lenders charge borrowers, can earn a mortgage loan even more expensive. According to Bankrate.com, closing prices average $2,732 on a $200,000 mortgage loan. FHA loans, however, include reduced closing costs. Lenders can charge a maximum of 1% of the amount borrowed when originating an FHA loan. That usually means that closing prices might be a maximum of $2,000 on a $200,000 mortgage loan.
No Immediate Originating
HUD does not directly arise its loans. It only insures loans. Private lenders, banks, thrifts and other financial institutions actually originate these loans. Consumers who apply for FHA loans, then, must do so via a private lender that’s licensed to utilize the government. Fortunately, most lenders are HUD-registered.