Are you ready to buy a house? Congratulations! Now, it’s time to start looking at mortgages.
Chances are, your mortgage will be the most significant loan you get in your lifetime. That’s why it’s so important to understand your best options.
Homebuyers searching for smaller down payments and more flexible qualifications have found success through home buying loans backed by the Federal Housing Administration (FHA). Because the FHA insures these loans, borrowers who might not ordinarily qualify for a conventional mortgage can qualify for an FHA mortgage loan.
This article will dig into the pros and cons of an FHA loan to help you decide whether it’s the best loan product for your financial situation.
What is an FHA Loan?
The Federal Housing Administration created the FHA loan as a way to help homebuyers with less-than-perfect credit or finances buy a home. An FHA mortgage loan is particularly beneficial for anyone buying their first home who may not have been able to save up enough for a bigger down payment. FHA loans are also useful for homebuyers who might be carrying additional debt, such as student loans or consumer credit card debt. And unless you’re using cash to purchase your home, you’ll need a mortgage.
Mortgages come in two basic arrangements: conventional and government-backed.
A government agency does not back conventional mortgages, making them more challenging to qualify for compared to government-backed loans. Conventional mortgages ordinarily require a minimum down payment of 5% but this comes with higher costs, a credit score of at least 620, and a debt-to-income ratio (how much income you have versus how much debt you have) of 40%.
A federal government agency guarantees a government-backed mortgage; the Federal Housing Administration (FHA) backs an FHA loan. The FHA will back your loan, but you don’t apply through the FHA. You’ll apply through an FHA-approved lender, like River City Mortgage. Because the FHA guarantees your mortgage, the lender receives compensation through the FHA if you default on the payment, allowing more people to qualify for home loans.
FHA loans generally offer a minimum down payment of 3.5%, a credit score of 580, and a debt-to-income ratio of up to 50%.
Pros and Cons of FHA Loans
FHA loans are popular choices for first-time home buyers or anyone needing more flexibility because of their credit or finances. Keep reading to explore the pros and cons of an FHA loan to see if it’s right for you.
FHA loans: The Advantages
FHA loans have more lenient borrowing requirements regarding credit scores, debt-to-income ratios, and down payment amounts, allowing more people to own a home even with imperfect finances.
Unlike other mortgage options, like Fannie Mae and Freddie Mac that require borrowers to meet predetermined income levels, you can be eligible for an FHA loan regardless of how much money you earn.
If your down payment is less than 20%, conventional mortgages require borrowers to get private mortgage insurance (PMI) totaling between 0.5% and 1% of your total mortgage loan amount. FHA loans do not require borrowers to get PMI.
Another pro of FHA loans is that you can refinance your FHA loan if interest rates drop, if your financial situation improves, or you want new mortgage term with little to no documentation.
FHA loans: The Disadvantages
While you won’t have to get private mortgage insurance for your FHA loan, you will need to pay a mortgage insurance premium (MIP) of roughly 1.75% of your total loan amount at closing — you can often roll this amount into your mortgage, eliminating the out-of-pocket expense. Additionally, an annual MIP amount will be calculated but paid monthly.
A 3.5% down payment is great, but if you’re an eligible military veteran, you may qualify for a zero-down payment loan through the VA loan program.
Depending on where you’re looking to buy or your home goals, the FHA could limit your borrowing amount in specific scenarios.
FHA loans require that the home you want to buy is structurally safe and habitable. In other words, you can’t use the loan for a fixer-upper that requires you to live somewhere else while you renovate. FHA loans also can’t be used for vacation or rental properties.
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Is an FHA loan right for you?
If you're considering buying a home, an FHA loan might be the right choice for you. To help you decide, start by considering these important points:
- How much money can I really afford to spend on a home?
- How much money do I have saved for the down payment?
- Do I have good credit? What is my credit score?
Who FHA Loans are perfect for:
- If you're in the market for your first home and would benefit from more lenient credit and eligibility requirements in a mortgage.
- If you have a down payment that's less than 20%.
- If you are looking for the security that having a government-backed loan brings to your mortgage.
FHA loan requirements in a nutshell:
- You must be at least 18 years of age
- The home you want to purchase must be your primary residence (not a rental or vacation property)
- An FHA-approved appraiser must do the home appraisal
- Mortgage insurance premium (MIP) is required
- You've been working for two years and can prove your income is reliable
- You have a credit score of at least 580 (for a 3.5% down payment)
- You're debt-to-income ratio, including student loans, is less than 50%
- You have an FHA-approved lender, like River City Mortgage
It's important to carefully evaluate potential lenders to find the best for your situation and your family.
That's why we can't wait to sit down with you, at your kitchen table, in our office, or virtually to answer your questions and help you go over all the information at hand.
Get in touch with River City Mortgage's FHA regional loan officers today and take advantage of our no-cost consultation. It only takes a few minutes. We'll help you get pre-qualified for your mortgage and go over the different financing options available to you. We'll walk you through what to expect throughout the home buying process and even provide you with a pre-approval letter to help you make a serious offer on the home you want for your family.