Starting the home loan process begins with learning about all your financing options. And one common option (that you’ve probably already heard of) is a Federal Housing Administration (FHA) loan. FHA loans are a popular choice among different kinds of homebuyers and owners because they can suit a variety of scenarios, needs and goals.
But is it the answer for you?
Whether you’re looking to buy your first home, refinance your current mortgage or renovate a property with potential, an FHA loan could be your solution to financing it.
What’s an FHA Loan?
Simply put, an FHA loan is a loan that’s insured by the Federal Housing Administration, which is an agency under the U.S. Department of Housing and Urban Development (HUD). This means your lender is protected if you happen to default on your mortgage. Because they’re insured, however, lenders are more inclined to approve borrowers who may not qualify for other conventional mortgages.
What Kind of FHA Loans are There?
The FHA insures multiple types of loan programs. While we’ll list some of the most common ones below, you can find more specific information and details on the HUD website.
Purchase or Refinance
Fixed-rate and adjustable-rate mortgages, like the Basic Home Mortgage Loan 203(b), are available if you’re looking to buy a single-family home or condominium. If you’re a first-time homebuyer, you’d be among many borrowers who choose to apply for an FHA loan because of their lower down payment and credit score requirements. The FHA also offers different types of refinance loans, including streamline refinances, if you’re already a homeowner and are thinking about taking cash out or changing your loan terms.
Renovate, Repair or Build
Let’s say you’ve found potential in a property that just needs some tender loving care. Or you’ve decided that none of the homes you’ve seen on the market are up to your standards. The FHA insures loans, called the 203(k) Rehabilitation Mortgage Insurance Program, that can help you remodel, improve or build the home of your dreams.
Buy a Manufactured Home or Lot
A manufactured home is property that’s built in a factory and then installed on a lot. Whether you already have a lot purchased or are planning to buy a manufactured home along with a lot, you could look into the Title I Manufactured Home Loan Program which is insured by the FHA.
Other Types of FHA Loans
The FHA insures many other types of mortgages, including those for energy-efficient improvements, older borrowers or homes on restricted lands such as Hawaii or native tribal land.
How Can You Qualify for an FHA Loan?
The reason why FHA loans are popular among first-time buyers and borrowers who may not have enough money upfront for a high down payment is because of their requirements. Typically, FHA loans require lower down payments and credit scores and have lower closing costs than other types of mortgages. More specific requirements depend on the type of loan you’re getting, your personal financial situation and the property you own or want to buy.
For example, if you have a credit score of 580 or higher, you may be able to pay a down payment of 3.5% of your home’s purchase price.
These types of requirements help make homeownership more accessible for those who have poor to fair credit or low income.
Pros and Cons
Pros
As you may have probably already guessed, some of the biggest pros to an FHA loan are their lower credit score and down payment requirements. You may also be able to qualify with a higher debt-to-income (DTI) ratio.
Since FHA loans can be easier to qualify for than other types of loans, you may be able to get to closing day quicker. This can help you own your home faster and enable you to start building equity sooner.
Cons
All FHA loans require mortgage insurance premiums, which means you’ll be paying for insurance for the life of the loan unless you refinance it into a non-FHA loan.
In addition, you’ll have to adhere to property price requirements for an FHA loan. You won’t be allowed to borrow more than certain amounts depending on your location, which you can look up on the FHA Mortgage Limits page of the HUD’s website.
Applying for an FHA Loan?
So, is an FHA loan right for you? It depends.
If you have a low credit score and/or less money in savings for any upfront costs, an FHA loan could make it easier for you to buy your home. However, you may be paying more for an FHA mortgage than other types since annual percentage rates are higher for FHA loans than other types of mortgages.
Take these details into consideration as you’re deciding what type of loan to apply for.
Preparing to Buy a Home
Even if you don’t end up applying for an FHA loan, understanding this type of loan’s uses, requirements, benefits and drawbacks could help you determine what will or won’t work for your personal situation. Educating yourself about the different types of home loans, including FHA loans, can provide you with solid information about the mortgage process in general and about how you can prepare your finances before embarking on your homebuying journey.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
