For many first-time homebuyers and those with lower credit scores, an FHA loan can be the gateway to affordable homeownership. FHA loans are government-backed mortgages insured by the Federal Housing Administration (FHA).

Because they have more flexible credit and down payment requirements than conventional loans, FHA loans give more buyers the chance to qualify.

In this complete guide to FHA loan benefits, we’ll outline the top 10 pros that make these loans a top choice for millions of borrowers.

Top 10 Benefits of FHA Loans

Here are the key advantages FHA loans offer compared to conventional mortgages:

1. Low Down Payments

The #1 benefit of FHA loans is the ability to buy with a low down payment. You can get an FHA loan with just 3.5% down if your credit score is 580 or higher. On a $300,000 home, that’s only $10,500 upfront.

2. Gift Funds Allowed

Not only are low down payments allowed, but the down payment can come from gift funds Family or friends can gift you money for the down payment with proper documentation.

3. Lower Credit Scores Accepted

Whereas conventional loans require a 620 FICO score, you may qualify for an FHA loan with a score as low as 580. This helps more buyers with poorer credit buy.

4. Higher Debt-to-Income Ratio Allowed

Your DTI compares your total monthly debt to income. FHA loans allow DTIs as high as 57% with certain compensating factors.

5. Non-Occupant Co-Borrowers Allowed

You can add a co-signer who won’t live in the home, such as a family member This helps you qualify by combining incomes

6. Lower Mortgage Insurance

FHA loans require mortgage insurance if you put less than 20% down. But FHA mortgage insurance rates are lower than on conventional loans.

7. Assumable Mortgages

FHA loans can be assumed by a new buyer if you need to sell. This can make the home easier to sell later.

8. Fixed & Adjustable Rates Available

You can choose a fixed-rate FHA loan to lock in a low rate, or an adjustable-rate mortgage if you want lower initial payments.

9. Lenient Late Payment Policy

The FHA will let you qualify with up to two 30-day late mortgage payments in the past year, if you can explain them.

10. Nationwide Availability

Any lender approved to do FHA loans can offer them. So they are easy to find and offer consistent terms.

Now let’s explore each of these FHA loan benefits in more detail…

#1 – Low Down Payment Options

The biggest hurdle for most first-time purchasers is saving enough for the down payment. Low down payments of just 3.5% make FHA loans much more affordable.

Here are some examples of FHA down payments:

• On a $200,000 home, 3.5% is only $7,000
• On a $300,000 home, 3.5% is $10,500
• On a $500,000 home, 3.5% is $17,500

As long as you have a credit score of 580 or higher, you can buy with an FHA loan and as little as 3.5% down.

If your score is 500-579, you’ll need at least 10% down to qualify. But 10% is still less than the 20% typically required on conventional mortgages.

#2 – Gift Funds Can Be Used

In addition to low down payments, FHA guidelines allow using gift funds for some or all of the down payment.

Family members often gift money to help loved ones buy their first home. The FHA allows this with proper documentation:

• Gift letter stating name, amount, and relationship
• Proof gift giver has funds available
• Paper trail showing transfer of funds as gift

Gifts can come from:

• Relatives
• Future spouse
• Employer
• Charitable organizations
• Government agencies

Documenting gift funds takes extra steps but it’s worth it to raise a lower down payment.

#3 – Lower Credit Score Requirements

Whereas conventional mortgages will only approve borrowers with a minimum 620 credit score, FHA loans allow scores as low as 580.

Here are the FHA credit score requirements:

• 580-599 – At least 10% down payment required
• 600+ – Minimum 3.5% down payment allowed

So even if you have less-than-perfect credit, an FHA loan gives you a fighting chance at homeownership.

Just be aware that the lower your score, the higher your interest rate and mortgage insurance costs will be. So work to get your score up before applying.

#4 – Higher Debt-to-Income Ratios Permitted

Your debt-to-income ratio (DTI) measures how much debt you have compared to your income. It’s calculated by dividing your total monthly debt by gross monthly income.

Most conventional mortgages want your DTI to be 36% or lower. But with FHA loans, you can qualify with a DTI as high as 57% with compensating factors.

FHA debt-to-income limits consider:

• Your credit score and history
• How much cash you have leftover each month
• Substantial down payment funds
• Mortgage insurance premiums paid

Carefully manage other debts and secure a larger down payment to push up your DTI allowance.

#5 – Non-Occupant Co-Borrowers Allowed

Adding a co-borrower to your FHA loan application can improve your chances of approval. FHA guidelines even let you add a non-occupant co-borrower.

A non-occupant co-borrower can be a:

• Parent
• Sibling
• Child
• Other relative
• Close friend

This person co-signs on the mortgage, allowing you to combine incomes to qualify. But they don’t have to live in the home.

Before adding a co-borrower, consider how it impacts both your financial situations long-term.

#6 – Lower Mortgage Insurance Rates

FHA loans require mortgage insurance if you put down less than 20%. This protects the lender if you default.

The good news is FHA mortgage insurance rates are lower than on conventional loans. Here are the current rates:

FHA Loans

• Upfront – 1.75% of loan amount
• Annual – 0.45% to 1.05% of loan amount

Conventional Loans

• Upfront – 1.75% to 2%
• Annual – 0.5% to 1.2%

Carefully compare quotes, but FHA mortgage insurance comes out a little cheaper in most cases.

#7 – Assumable Mortgages

FHA loans are assumable under certain conditions, which can make them easier to sell later.

If you need to move within a few years, the buyer may be able to take over or assume your FHA mortgage. This avoids you having to pay off the loan.

To assume an FHA loan, the new buyer must:

• Occupy as primary residence
• Qualify with lender
• Pay assumption fee

Check if your mortgage allows for assumption before counting on it. But it’s a nice perk of FHA loans.

#8 – Fixed & Adjustable Rates Available

You can choose between a fixed or adjustable interest rate on an FHA loan:

Fixed-Rate

• Interest rate stays the same for loan term
• Predictable payments
• Build equity faster

Adjustable-Rate

• Initial teaser rate, which then fluctuates
• Lower initial payments
• Caps limit rate changes

Go with a fixed-rate to lock in low rates for the long haul. Or pick an adjustable if you plan a shorter hold.

#9 – More Lenient Late Payment Policy

The FHA generally allows some late mortgage payments on your credit report:

• Up to two 30-day late payments in past 12 months
• If you can explain them to the lender

This is more flexible than conventional loans. Just be sure to maintain excellent payment history outside of 30-day lates.

#10 – Available from Most Lenders

Because FHA loans are government-backed, any lender approved to originate them can offer FHA mortgages. Availability from lenders nationwide adds to their appeal.

Large banks, credit unions, online lenders and more offer FHA loans with consistent terms and requirements. Shop around for the best rates and service.

In Conclusion…

The many perks and advantages of FHA loans make them the right mortgage choice for millions of buyers every year. If you want flexible qualifying criteria, these government-backed loans open the door to homeownership.