Most people looking to buy a house in the near future will also have to review the market for suitable loans. FHA loans, backed by the Federal Housing Administration, are among the most popular because of the low down payment options, flexible credit guidelines, and level of accessibility.
However, things can get a bit confusing since there are several types of FHA loans, and each has specific requirements and conditions. To make things a bit easier for those looking to buy, we’ll look at the most common types of FHA loans and try to explain the differences between them.
The Traditional Mortgage
This type of FHA loan is the most common and what most people think of when they start looking into getting a mortgage. The loan accepts first-time buyers who have a lower income and covers properties that will be used as a primary residence (a loan for your home, if you’d like).
While this type of loan is the go-to solution for many young borrowers (who may also have bad credit history), it must be considered with care. After all, one of the features to consider when buying a house is making sure you can pay the mortgage and the extra costs that homeownership involves (such as insurance, maintenance, or repairs).
Home Equity Conversion Mortgage
Also known as a reverse mortgage, this type of loan is designed for senior homeowners (ages 62 and up) in need of cash. The program converts a person’s equity in the house into cash withdrawals which can be a fixed amount, a line of credit, or a combination. Also, the person retains the home’s title, so it’s not a sale.
Still, borrowers have to continue paying insurance premiums, property taxes, and other fees associated with homeownership.
203(k) Improvement Loan
Home renovations are costly, and not everyone can afford to pay the price. However, the longer you put off maintenance and renovations, the costlier and more necessary they become, turning everything into a vicious circle you can’t escape.
Plus, home improvements are even more important when you’re buying a home and want to bring it up to modern living standards. Or maybe you’re happy to buy a bit of a fixer-upper and want to make sure you’ll have the funds to turn it into your dream home.
If this is the case, you should check out the 203(k) loan (also, check the standard vs. streamline 203 (k) loans for a more accurate image of this type of FHA loan).
FHA Energy Efficient Mortgage
Similar to the 203(k) loan type, this FHA loan helps you fund home improvement projects, but only if they are aimed at reducing utility bills.
So, if you want to install solar panels on the roof or set up a wind energy system in the backyard, you can use funds from the Energy Efficient program. The same goes for new insulation and other similar renovations.
The reason behind this type of loan is that energy-efficient homes spend less on bills, so homeowners will have more funds available to pay the mortgage and other home-related costs. Plus, you also have the chance to reduce the carbon footprint of your home and become more environmentally friendly.
Section 245(a) Loan
This type of loan is for those borrowers who expect an increase in income in the near future. The program covers the Graduated Payment Mortgage and the Growing Equity Mortgage and is designed to help reduce the loan terms while also increasing the monthly principal payments.
Keep in mind that this program is not for investment properties; only for houses that will be used as residencies!
Wrap Up
The five different types of FHA loans create a wide range of opportunities for borrowers who can’t afford a loan the traditional way. However, it’s important to pay attention to the conditions since there are some strict limits and requirements.