If you’re in the process of buying a home, you’ve probably heard a bit about FHA loans. This type of home loan might be an ideal choice for you, depending on your circumstances. But before you pursue a loan that’s wrong for you, or worse, take out a loan that doesn’t give you what you need or desire, it’s important to understand exactly what FHA loans are and how they might apply to your situation.
This article will provide an in depth look into FHA loans, who can benefit from them, who is eligible to receive them, and how they work.
What is an FHA Loan?
The FHA in FHA Loan stands for Federal Housing Administration, and the reason for that is that the FHA is the government agency that makes these loans possible. They do so by providing mortgage insurance on loans made by FHA approved lenders. The FHA insures more residences than does any other insurer in the world.
Who Qualifies for an FHA Loan?
There are many criteria that must be met in order for a potential homeowner to qualify for an FHA loan, but some of them might surprise you. The FHA loan is often seen as a loan explicitly intended for first time home buyers, but this is not a requirement. However, there are other criteria you must meet.
All FHA applicants will need a credit score of at least 500. With this score, you will qualify for a 10% down payment. If your credit score is 580 or above, you will qualify for a 3.5% down payment. Additionally, as with any loan, you must prove employment and sufficient income. You must apply using the Uniform Residential Loan Application, and the property in question must meet HUD’s minimum safety standards.
What are the Benefits?
There are many reasons you may want to consider applying for an FHA loan:
Lower required down payments. With as low as a 3.5% down payment possible for the recipients of FHA loans, you can go in with a much smaller nest egg.
Less strenuous credit score requirements. If your credit isn’t what you’d like, an FHA loan may be able to help bridge the gap.
A helpful step for first time buyers. If you’re not used to negotiating the ins and outs of the real estate market, an FHA loan is an easy walk through the process. It’s also helpful for those who are just starting out and who might have fewer assets and more loans to their names than older, more established homeowners.
What are the Drawbacks?
Why might a conventional loan be better than an FHA loan for you?
The money you don’t pay upfront, you’ll owe later. You get a break on your down payment, but you’ll have to pay monthly insurance premiums in exchange for that reprieve.
Housing requirements. The home of your dreams might not meet the health and safety requirements needed for an FHA loan, particularly if it’s a fixer-upper.
Loan limits. There are maximum limit amounts for FHA loans. It’s possible that the maximum might be less than what you’re hoping to borrow.
Speak to your lender about what kind of home loan is right for you—they’ll be able to give you good advice that will help you make an informed decision.