FHA loans are a popular term in the mortgage industry and one you have probably heard of before. Find out everything you need to know about FHA Loans and if this home loan is the right type of loan for you.
What is an FHA Loan?
- An FHA loan is a mortgage that is insured by the FHA or the Federal Housing Administration. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
- FHA loans can be especially attractive to first-time homebuyers because of their lower down payment requirements and more lenient qualifying guidelines compared to other loan options.
- Down payments on a house can typically range between 10% and 20%, but with a FHA loan the down payment can be as little as 3.5%. Your down payment can also come 100% from gift funds with an FHA loan.
- FHA loans are also available on both fixed-rate and adjustable rate mortgages, giving buyers even more options to get the loan that best fits with their financial needs.
Qualifying for an FHA Loan
Individuals applying for an FHA loan can typically have a lower credit score than those applying for a conventional home loan. In order to qualify for an FHA Loan a minimum credit score of 600 is a good baseline. Some lenders may allow for a lower credit score.
Debt-to-income (DTI) Ratio
FHA guidelines generally require that your total DTI does not exceed 43%. Your mortgage loan advisor can help you determine if you can use other compensating factors, such as documented cash reserves, a larger down payment, or a demonstrated “conservative” use of credit to help meet DTI requirements.
Benefits and Drawbacks of an FHA Loan
Each different loan type will have benefits and potential drawbacks. It’s important to understand the different factors of the loan to find out which loan type is best for your situation.
Some of the Benefits of an FHA Loan:
- More lenient qualifications
- Lower down payment needed
- More affordable to buyers
- Lower credit score required
- Closing costs can be less
Some of the Potential Drawbacks of an FHA Loan:
- Home must be owner-occupied
- Required to pay mortgage insurance
- Potentially lower loan ceiling
Talking with a loan advisor can help answer additional questions you may have about FHA loans and help you decide if this loan type is right for you.