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The government created the Federal Housing Administration in 1934 to assist people in transitioning into home ownership from renting. To assist in the process, FHA guarantees, but does not issue, mortgages. This guarantee makes lenders more willing to issue mortgages to people who cannot afford large down payments because the FHA will step in should the borrower fail to repay what is owed on the mortgage.
Down Payment Requirements
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People with limited cash reserves turn to FHA mortgages because of the low down payment requirements compared to conventional mortgages. If you do not qualify for a mortgage guaranteed by the Department of Veterans Affairs, which requires you to meet military service requirements, an FHA mortgage offers the smallest down payment of just 3.5 percent. In addition, you can roll some of the closing costs of the mortgage into the loan. Conventional mortgages often require at least 20 percent as a down payment, which can make it difficult for people to save up enough money to make the transition from renting to owning.
Mortgage Insurance
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By law, FHA charges its own mortgage insurance premiums, because lenders cannot charge their own private mortgage insurance. The FHA mortgage insurance premiums FHA have two parts: a lump sum payment at the time the loan starts and an ongoing monthly premium. The size of the premiums depends on the size of the down payment and how quickly you pay off the loan.
Interest Rate
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Bankrate warns that FHA mortgages typically have slightly higher interest rates than conventional mortgages, but the difference will not be too large unless you have significant negative information in your credit report. However, this makes it important that if you are considering an FHA mortgage, you take the time to get rates from multiple lenders. Even a small difference in interest rates can make a big difference over the life of your loan.
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