El Paso, a town sitting right at the border of the United States and Mexico, is known for its large number of military presence. With this in mind, there are several federal assistance programs being provided by the government for its population one of which is the FHA loan. What is an FHA loan you may ask? It is basically a mortgage insured by the Federal Housing Administration (FHA) and provided by an FHA lender who is approved.
These kinds of loans are more geared towards first time home buyers in El Paso as compared to real estate investors. This is because they allow low-income earners to borrow money to purchase a house that would not be affordable to them under normal circumstances.
FHA loans typically have low down payments, therefore, posing a greater risk to the lender. The home-buyer in question is expected to pay a two-part mortgage: a one-time bulk payment at the beginning and monthly payments thereafter to compensate for the risk the lender is taking.
How FHA loans came to be
FHA loans were established as part of the National Housing Act of 1934. This was due to the increase in the number of foreclosure on family homes at the time. The government saw this as a solution to the housing market with its main aim being to regulate interest and mortgage terms.
Before FHA loans, most existing loans were short-term with repayment periods ranging between 3 and 5 years. The introduction of this practice caused an increase in the number of people who could now afford the down payment and the monthly installments to the lender resulting in more homeowners in the region.
The application process for an FHA loan in El Paso
The FHA does not provide loans. Instead, it insures the loans provided by private lenders. The first step to acquiring this type of loan is reaching out to several lenders and inquiring if they are approved to originate FHA loans.
Once you get a lender who meets this requirement, he or she will then assess you as a homebuyer for the risk to be involved. This will include taking a look at your payment history on previous debts, checking if you have a steady employment history among other self-specifications that they may have.
With a credit score of 580 and above, you can make a down payment of as low as 3.5% of the total. However, if your credit score is 579 and below, your down payment will be at 10%. Analysis done by the lender will give you a rough idea of the type of home you can afford based on your income, expenses and the calculated risk metric. After checking out all the lender’s requirements you are eligible to apply and get an FHA loan in El Paso.
Pros and cons involved
Primary benefits of an FHA loan in El Paso are:
The credit score requirement is relatively lower compared to regular home mortgage loans. They are less stringent because of the insurance the government issues lenders protecting them from losses resulting from borrowers defaulting.
Requires a lower down payment. This makes it affordable to low-income earners who would like to own a house.
When it comes to closing costs, it allows the seller to pay up to 6% of the loan amount to cover the closing cost of the buyer. This is a big benefit as a lot of buyers, especially first-timers, save up for the down payment and have nothing more afterward.
FHA loans are assumable mortgages and this serves as a plus. It simply means that if you want to sell your house, the intended buyer can “assume” your current loan. It does not pose an issue
On the other hand, there are also some disadvantages to these loan types. They are:
There is a probability of getting a higher interest rate compared to conventional mortgage loans. This means you will incur a higher cost.
Mortgage insurance premiums should be paid. When it comes to FHA loans there are two types of mortgage insurance payments: the upfront premium and the annual premium. Upfront premium, as the name suggests, is paid when you close on the home that you intend to buy. Annual premium refers to the broken down monthly portions added on to your mortgage.
FHA has some approval standards when it comes to condominiums. You cannot purchase those that do not meet their set standards. This means that you will only have a limited number of options if you choose this as your financing path.
Multiple offers on a house also pose another disadvantage. Say there are equal offers from people with a conventional mortgage and you with an FHA loan, the buyer is often inclined to go with the former. This is due to the stigma that comes with closing cost charges incurred by the seller in the latter.
In conclusion to the above, it all comes down to you to decide on whether the pros outweigh the cons. If you are a first-time home buyer in El Paso with a low credit score and can only afford a small down payment, then the FHA loan would be a good choice for you.
Owning a home helps avoid rent costs that inflate by the day as well as gain a sense of stability in society. It is advisable to speak to lenders and mortgage experts to illuminate further on all that comes with owning a house.
