While there’s a lot to like about FHA loans, they may not be right for everyone. Before you make a major financial commitment, it’s important to understand the pros and cons of FHA loans. Only then can you truly decide whether it’s right for you.
Buying a new home is one of the most exciting times in anyone’s life. After months of searching, you’ve finally found the perfect place to call your own. But now comes the tricky part – figuring out how to pay for it all. This is where an FHA loan can help.
FHA loans are government-backed mortgages insured by the Federal Housing Administration They are designed to make homeownership more accessible, especially for first-time homebuyers FHA loans offer some great advantages that can make getting approved much easier compared to conventional mortgages.
In this article, we’ll explore the top 12 perks of getting an FHA loan so you can decide if it’s the right choice when buying your dream home.
1. Easier Credit Qualifications
One of the best things about an FHA loan is the flexibility when it comes to your credit score. Many conventional mortgages require excellent credit, with minimum scores around 620 or higher. But with an FHA loan, you may qualify with a credit score as low as 500 (though many lenders require 580). This makes it possible to get approved even if you have less-than-perfect credit
2. Shorter Time to Qualify After Credit Issues
Along with lenient credit requirements, FHA loans allow you to qualify more quickly after negative credit events. You may be able to get approved just 12 months after a bankruptcy, foreclosure, or short sale. With a conventional loan, you often have to wait 2-7 years. This shortened waiting period opens doors sooner if you’ve had recent money struggles.
3. Low Down Payment
Down payments are one of the biggest barriers for hopeful buyers. FHA loans make this hurdle much lower, requiring just 3.5% down if your credit score is 580 or above. This is compared to the standard 20% down payment required for conventional mortgages. Being able to keep more money in your pocket upfront makes an FHA loan much more accessible.
4. More Lenient on Gift Funds
Not only is the down payment lower, but FHA loans allow your entire down payment to come from a financial gift. Whether from family or a nonprofit, 100% of the down payment can be gifted funds as long as proper documentation is provided. This gives added flexibility if you don’t have cash savings of your own.
5. Low (or No) Closing Costs
Closing costs, including lender fees, appraisals, and more, add another large expense when buying a home. FHA guidelines restrict the total fees lenders can charge, making these costs more affordable. Sellers may even be able to cover all your closing costs in some cases, eliminating this burden completely.
6. More Affordable FHA Mortgage Insurance
All FHA borrowers are required to pay for mortgage insurance, protecting the lender in case of default. While this adds a cost, FHA mortgage insurance rates are lower compared to conventional loans. Recent changes by the government also reduced this expense for new FHA borrowers. This makes mortgage insurance less of a hardship.
7. Lenient FHA Debt-to-Income Ratio
Your debt-to-income (DTI) ratio compares your total monthly debts to your gross monthly income. FHA loans allow for more flexibility with DTI, with approval possible for ratios around 43-45% in some cases. This percentage can be even higher with certain compensating factors. The leniency makes approval possible even with moderate existing debts.
8. Non-Occupant Co-Borrowers Accepted
Co-borrowers who won’t live in the home, like parents or siblings, are allowed with FHA loans. Their income can help you qualify for a larger loan amount and better terms. Conventional mortgages typically only consider the income of borrowers occupying the home. Expanding options with a co-borrower provides added opportunity.
9. Lower Interest Rates
Since they are insured by the government, FHA loans are considered lower risk for lenders. The added protection means lenders can offer lower interest rates compared to conventional mortgages in many cases. Lower rates save you significantly over the life of the loan.
10. Low Monthly Mortgage Insurance
While required, FHA mortgage insurance premiums are competitive, especially after recent reductions by the government. Monthly premiums now add only a slight increase to your regular mortgage payment. Annual premiums are also removed after 11 years if you put down over 10%. Low costs make this requirement less painful.
11. Options for First-Time Homebuyers
The flexibility of FHA loans makes them one of the most popular options for first-time homebuyers. If you don’t have experience with homeownership, the leniency and advantages help counteract factors working against you. FHA loans help open the door.
12. Numerous Down Payment Assistance Programs
Finally, FHA loans pair well with down payment assistance programs available through local governments, nonprofits, and employers. These programs provide even more ways to make your down payment and upfront costs more affordable as a first-time buyer. Ask your lender how to take advantage.
Wrapping Up
As you can see, FHA loans offer significant perks compared to conventional mortgages. From easier approval to lower monthly payments, they make buying your first home much more accessible. If you’re eager to buy but don’t have perfect credit or ample savings, an FHA loan should definitely be on your radar.
While not right for everyone, FHA loans provide options that simply aren’t available with other mortgages. If homeownership is your dream, be sure to explore this financing route that may just make owning possible sooner than you ever imagined. With numerous advantages and added flexibility, you can feel confident an FHA loan can get you into your perfect home.
Pros of FHA Loans
An FHA loan is designed to help potential homebuyers with less-than-perfect finances buy a home. It offers many potential benefits that you may not be able to get when applying for a conventional mortgage. Here’s a closer look at some of the most important advantages of an FHA loan.
If you don’t want to wait forever to buy a home, the lower down payment requirement is one of the biggest FHA loan advantages. Most FHA loans allow you to put down as little as 3.5% of the purchase price. This is a huge advantage for buyers who dont have a large savings account or have limited financial resources. Other mortgage products may have down payments closer to the 20% mark.
Taking advantage of this opportunity can help you get into a home many years sooner than you could if you had to save up a larger amount.
Lower Credit Score Requirements
Many people with bumps in their credit history worry that they wont be able to qualify for a home loan. Luckily, FHA loans are available to borrowers with less-than-ideal credit.
Most lenders will write FHA-backed loans for borrowers with credit scores of 580 or higher. If you’re in the 500-579 range, don’t despair. You can also qualify for an FHA loan, but you may need to come up with a 10% down payment instead of the standard 3.5%.
Note: Paddio currently looks for credit scores of 620 and above.
FHA loans are also sometimes a good option for people who have recently gone through a foreclosure or bankruptcy. Depending on your circumstances, you may be able to qualify for an FHA loan within one to two years after the incident.
FHA loans don’t have any minimum or maximum income requirements. This is a unique benefit not found in many other mortgage products, aside from the USDA loan. This means that higher-income earners with credit problems can still qualify for FHA loans. Even if you make a substantial salary each year, you can still benefit from the lower down payment and relaxed approval requirements.
You can use an FHA loan to purchase multiple types of properties. This includes single-family homes, condominiums on permanent land, manufactured homes on permanent land and multifamily homes with up to four units – though you may have a hard time finding a lender willing to do a manufactured loan.
This gives you plenty of options and some room to get creative. For example, you could buy a multifamily home and use the rent you would charge on the other units to qualify for the loan, as long as you live there as well.
Note: Paddio does not offer FHA financing for manufactured homes
If you put less than a 20% down payment, most conventional loans require you to carry Private Mortgage Insurance (PMI). This insurance provides the lender protection in case you fail to repay your loan. The premiums for PMI are often much higher if you have bad credit. With an FHA loan, however, you’ll pay the same insurance premium regardless of your credit score. If you’re credit-challenged, this could save you a significant amount of money over the lifetime of your loan.
The Good and BAD of FHA Loans | NEW FHA Loan Requirements 2023
FAQ
What is the benefit of getting an FHA loan?
What is the downside of an FHA loan?
Is it worth it to get an FHA loan?
What is the greatest advantage of using FHA?
What are the benefits of an FHA loan?
Here are the benefits of an FHA loan to expect: 1. Lower Minimum Credit Scores FHA loan credit score minimum requirements range between 500 and 580, depending on the lender. This can help credit-challenged borrowers qualify for a mortgage.
What are the pros and cons of an FHA loan?
Here’s a rundown of the pros and cons of FHA loans. FHA loans offer borrowers advantages to increase accessibility and affordability. Here are the benefits of an FHA loan to expect: 1. Lower Minimum Credit Scores FHA loan credit score minimum requirements range between 500 and 580, depending on the lender.
Is it beneficial to get an FHA loan?
An FHA loan can be beneficial for borrowers with a relatively low credit score and a significant amount of debt. Known to be more forgiving and less restrictive than some other loan types, FHA loans present numerous benefits.
What is a good credit score for an FHA loan?
An FHA loan requires a minimum credit score of 580 for a 3.5% down payment. Rocket Mortgage® also requires a minimum credit score of 580 for FHA loans.