Homebuyers, especially first-time homebuyers, love FHA loans because of their low down payment and credit requirements.
But are they as great as everyone thinks they are? Are there any drawbacks to using an FHA loan?
In this article, we’re going to answer these questions as well as look at the benefits.
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What are FHA Loans?
The Federal Housing Administration was created to help increase homeownership in America. The FHA does not issue loans; they insure them.
If a borrower defaults on their loan payments, the lender is reimbursed for the remaining balance of the loan. This reduces the risk associated with offering loans allowing lenders to reduce their borrower requirements.
For instance, a conventional mortgage loan requires a 640 credit score and a down payment of 5-20%.
FHA loans require a 580 credit score with 3.5% down. These loosened requirements make FHA mortgages easier to qualify for than traditional loans.
FHA Loan Requirements
FHA-insured loans are the only type of mortgage that the amount of the down payment is tied to your credit score. Technically, the FHA will insure borrowers with as low as a 500 credit score with a 10% down payment.
Borrowers with at least a 580 credit score just need a 3.5% down payment.
- Max 43% debt-to-income ratio
- .80% – 1.05% Mortgage insurance premium
- Two years of income history
- Past two years of tax returns
- Recent bank statements
- Recent pay-stubs
- Must wait two years after a bankruptcy is discharged
FHA Loan Pros
- 500 credit score requirement with 10% down payment
- Minimum 580 credit score with just 3.5% down
- Down payment can be a gift from a friend or relative
- Higher debt-to-income ratios accepted
- Up to 6% of closing costs can be paid by the seller
- Low-interest rates
- Easier to qualify for than conventional loans
- Easy to refinance with streamline refinancing
FHA Loan Cons
- FHA loan limits are lower than conventional loans
- More restrictions on the types of homes that qualify
- Mortgage insurance required even if putting 20% down
- Higher mortgage insurance costs
- Upfront mortgage insurance premium
- Not available for investment or second properties
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Who Should Get an FHA Loan
FHA loans are not a perfect fit for everybody. For instance, if you have at least 20% for a down payment, then a conventional loan would be a better option because you can avoid PMI. FHA loans require mortgage insurance regardless of the amount of the down payment.
FHA loans are very popular with first-time homebuyers. Their low credit score and down payment requirements make qualifying for them much easier than traditional home loans.
Who should consider an FHA mortgage
- First-time home buyers
- Have less than 20% down payment
- Credit score is below 640
- Need a loan amount below FHA loan limit
- Have a high debt-to-income ratio
- Qualify for a down payment assistance
The Bottom Line
FHA home loans offer a ton of benefits for the right type of home buyer. First-time homebuyers, buyers with low credit scores or down payment, or low-income buyers can especially benefit from FHA loans.
Requiring just a 580 credit score and a 3.5 down payment, they are one of the easier types of home loans to qualify for.
Are you ready to see if you qualify for an FHA mortgage?