FHA Mortgages in Chicagoland
Looking to get a FHA loan in Chicago, or just want to learn more about them? We’re here to help you get all the information you need and help you on your journey to home ownership.
What is an FHA mortgage?
An FHA mortgage is a type of government-backed home loan insured by the Federal Housing Administration. Designed to encourage homeownership among those with lower credit or limited down payments, an FHA loan often requires a smaller down payment and may offer more lenient credit score requirements compared to conventional loans. This loan type offers an alternative for those who might not qualify for traditional financing options. The interest rate on an FHA mortgage can be either fixed or adjustable, but many homeowners opt for the fixed-rate version for its predictability. While an FHA loan offers these advantages, borrowers are required to pay mortgage insurance premiums, which can increase the overall cost of the loan.
How FHA mortgages work
Mortgage rates change regularly due to various factors. Today, you might see a rate of 6.75 percent, and tomorrow it could drop to 6.5 percent. With FHA mortgages that have a fixed rate, once your rate is established, it remains the same, unaffected by external market fluctuations.
Unlike ARMs (Adjustable Rate Mortgages), a fixed-rate FHA mortgage provides a consistent rate throughout the loan term. Your monthly payment on this loan type remains constant, but the distribution between principal and interest changes over time based on the amortization plan.
In the early months, a larger portion of your payment covers interest, while over time, an increasing fraction goes toward reducing the principal. This payment structure allows homeowners to slowly build equity in their property.
FHA loans come with some unique requirements to be able to be approved for the mortgage. Below is a comprehensive list of the requirements for an FHA loan for Illinois residents.
- Down payment of 3.5% or 10% if your credit score is below 580
- 2-year employment history with some exceptions allowed
- Fully document your income for the past two years
- Minimum FICO score requirement of 500 – down payment will vary
- Mortgage Insurance Premium (MIP) is required for every FHA loan
- Maximum debt to income ratio of 43% with exceptions up to 56%
- The home must be your primary residence
- No bankruptcies or foreclosures in the past two years
- Home must be Safe, Secure, and Structurally Sound.
Pros of an FHA Mortgage
The primary benefit of an FHA mortgage is its accessibility. With lower down payment requirements and more flexible credit score criteria, it opens the door for many first-time homebuyers. Securing a fixed-rate on an FHA loan means predictable payments, protecting homeowners from rising interest rates in the future. The FHA mortgage program is designed to support those who might not qualify for conventional financing, making homeownership achievable for a broader audience.
- Accessibility
- Lower Down Payment
- Flexibility in Credit Requirements
- Predictable Payments
- Support for a Wider Range of Borrowers
Cons of FHA Mortgage
The main drawback of an FHA mortgage is the requirement to pay mortgage insurance premiums, which can increase the lifetime cost of the loan. FHA loans may also have limits on the amount you can borrow, depending on the region. While they offer lower down payments, this can mean a larger loan amount and potentially higher monthly payments. If home values increase substantially, refinancing out of an FHA loan to a conventional loan to eliminate mortgage insurance might be a consideration, but it involves costs and potential hassles. Due to the government-backed nature of the loan, there’s sometimes added paperwork or requirements to meet.
- Mortgage Insurance Premiums
- Loan Limits Based on Region
- Potential for Higher Monthly Payments
- Considerations for Refinancing
- Additional Paperwork or Requirements