As we are all unique, it’s critical that when you begin your home buying journey you do thorough research on what loans you can apply for. A popular loan choice among first-time homebuyers is a Federal Housing Administration (FHA) Loan. Assisting people in purchasing their dream homes since 1934, FHA loans can be the perfect solution to moving you into your own.
What Is a Federal Housing Administration Loan (FHA Loan)?
Backed by the Federal Housing Administration, FHA loans were formed to help potential homebuyers with low-to-moderate income achieve homeownership. A primary characteristic that makes FHA loans an attractive option is that they require lower minimum down payments and credit scores.
FHA loans allow borrowers to qualify for down payments with as little as 3.5% down if their credit score is 580 or higher. If you have a credit score lower than 580, FHA loans help solve that situation as well. For credit scores between 500-579, borrowers can still receive a loan but a down payment of at least 10% is required. While these benefits sound stellar, it’s important to know that as a borrower you also have to pay mortgage insurance premiums as this protects your lender if you default.
Benefits of FHA Loans
While low credit scores and down payments are very important benefits associated with FHA loans, there are several additional advantages to receiving an FHA loan. Those include:
- The use of gift or grant funds for a down payment
- Upfront mortgage insurance premium can be financed
- Lower ongoing monthly mortgage insurance premiums (for those who qualify)
- More flexible underwriting criteria compared to conventional loans
- Mortgage can be taken over (or “assumed”) by qualified buyers when the home is sold
FHA vs. Conventional Loans
As you go through the home buying process, it’s not uncommon to frequently see FHA loans being compared to conventional loans. One of the major differences between the two is that while FHA loans are backed by the government, conventional loans are not. For more details, here’s a side by side comparison:
|FHA Loans||Conventional Loans|
|Minimum Credit Score||500||620|
|Loan Terms||15 or 30 years||10, 15, 20, or 30 years|
|Down Payment||3.5% for credit scores of 580 + 10% for credit scores between 500-579||3-20%|
|Private Mortgage Insurance (PMI)||Last the life of the loan||Dropped at 20% equity|
|Resident Restrictions||Must be the primary resident||No residence restrictions|
|Down Payment Gifts||100% of the down payment can be a gift||Only part of the down payment can be a gift if the down payment is less than 20%|
How to Qualify for an FHA Loan?
When it comes to qualifying for an FHA loan, credit score and down payment amounts are just the tip of the iceberg. There are several other requirements that go into applying for an FHA loan. To give you a general idea of what to expect, here are a few guidelines:
- Proof of steady employment history is required or proof of working at the same employer for at least two years
- You must have a valid Social Security number
- You must obtain a property appraisal from an FHA-approved appraiser.
For more information about FHA loans visit here.
While there is no doubt that FHA loans can be a great borrowing option, it all depends on your unique home buying needs. If you’re someone who’s credit score or income aligns with what FHA loans have to offer, then this may be the best loan option for you. It’s important to work with your lender to find out the best financing solution that will help place you in your dream home.
Questions about FHA loans, or general questions about the mortgage process? Reach out to one of our mortgage experts today.
The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. THIS PRODUCT OR SERVICE HAS NOT BEEN APPROVED OR ENDORSED BY ANY GOVERNMENTAL AGENCY, AND THIS OFFER IS NOT BEING MADE BY AN AGENCY OF THE GOVERNMENT. This is an advertisement. Prepared 1/22/2020