FHA home loans are an excellent option for individuals seeking to purchase a home but have recently experienced some form of financial hardship. The FHA loan program is often a good fit for first-time homebuyers, as well as anyone who has recently filed for bankruptcy. As a form of federally insured buyer’s assistance, you’ll need to apply and qualify for an FHA loan with the assistance of a reliable loan advisor.
FHA loans can support new and existing homeowners of all backgrounds, ages, and histories. However, many people that are able to get this type of loan aren’t even aware that they are eligible. While the interest rates associated with an FHA loan are typically higher than those of a conventional loan, the qualification requirements for an FHA mortgage are significantly lower. In this article, we’ll cover the basics of FHA loans and explain the benefits associated with this type of loan structure.
What is an FHA Loan?
An FHA loan is a federally backed mortgage that aims to make it easier for certain borrowers to purchase a new home. Potential homeowners who have recently experienced financial difficulties, such as bankruptcy or home foreclosure, can benefit from the lowered qualification requirements that come with FHA loans.
Both the credit score and down payment requirements for the loan are lower than most conventional alternatives. However, interest rates are often higher than average, and you’ll likely have to pay a mortgage insurance premium (MIP) over the course of the loan’s term. If you can qualify for other loan federally-backed loan programs, such as a VA or USDA loan, you’ll likely find that the terms of an FHA loan are not quite as favorable.
Differences Between an FHA Loan and a Conventional Loan
Conventional loans are designed for new and existing homeowners with a healthy credit score and stable income. It can take quite a while to achieve a qualifying credit score and save enough money for the down payment associated with a conventional loan. FHA loans are a good way to purchase a home sooner rather than later to support your family and lifestyle.
Deciding between a conventional loan and an FHA mortgage can be challenging. If you’re looking for professional guidance in making this experience, reach out to a local loan advisor. Conventional home loans can make the process of building equity significantly faster, but they aren’t for everyone. If you’re a first-time home buyer, you may be able to pair DPA (down payment assistance) with your FHA loan.
Who Qualifies as a First-Time Homebuyer?
While the answer to this question might seem somewhat obvious, the answer often differs from what many individuals expect. Anyone who hasn’t owned a home for a period of three years or more qualifies as a first-time homebuyer. Even if you’ve previously owned a home, you can still be considered a first-time homebuyer.
First-time homebuyers are eligible for a range of assistance programs, including federal down payment assistance and down payment assistance grants. FHA loans are popular amongst first-time homebuyers because the qualification requirements for obtaining a mortgage are significantly lower than they are for conventional loans.
Requirements for FHA Loans
The FHA program aims to make it easier for individuals to purchase a new primary residence, even if they don’t qualify for a conventional mortgage. An FHA loan might be a good fit if you’ve recently dealt with a foreclosure or bankruptcy.
Credit Score and Down Payment Requirements
FHA loans have varying down payment requirements depending on the credit score of the borrower. If your credit score is 580 or higher, you might only need to make a down payment of 3.5%. If your credit score is somewhere between 500 and 580, you’ll likely need to make a down payment of at least 10%.
If your credit score is 620 or higher, you might want to consider applying for a conventional home loan rather than an FHA mortgage. Before purchasing a home, it’s a good idea to evaluate your ability to make payments in the future. A good example of when you might want an FHA loan is when you have a new job lined up, but don’t have the cash on hand to make a 20% down payment- which might be required with a conventional product.
Primary Residence Requirements
If you’re planning to purchase an investment property or second home, you’ll to apply for a conventional loan instead of an FHA one. If you’re buying a home with an FHA loan, it must be your primary residence. This helps prevent borrowers from taking advantage of the federally backed loans for the purposes of buying a vacation home or similar property.
A monthly mortgage insurance premium (MIP) is usually something you’ll need to pay in addition to normal monthly costs when you borrow through the FHA program. However, if your down payment is 10% or higher, you might be able to avoid paying the MIP, for at least a portion of the loan term. However, FHA borrowers usually won’t have to worry about paying for private mortgage insurance (PMI), because the loan is federally backed.
Loan limits vary depending on your area- they may be as low $420,680 and as high as $970,800. Areas with higher average home prices and cost of living will have higher borrowing limits. If you’re not sure what the limits are for your area, reach out to a reliable loan advisor.