An FHA loan is a mortgage that is guaranteed by the government’s Federal Housing Administration. Because of this guarantee, FHA loans are often available to homebuyers who do not qualify for traditional mortgages.
Should I get an FHA loan?
An FHA loan is great for anyone; though first-time homebuyers, buyers looking for a loan option with a lower down payment or who are receiving gift funds to use towards a down payment, lower income buyers, and those with lower credit scores or higher debt-to-income ratios, often benefit from FHA loans. FHA loans are generally easier to qualify for than traditional mortgages.
So…what are the benefits?
- Lower down payment – These loans require a down payment lower than what is generally required for a conventional loan.
- Use of gift funds – FHA loans allow for gift funds from friends or family to be used to pay for the down payment or closing costs. While conventional loans may allow for use of gift funds, that money cannot cover the full amount of those costs.
- Lower credit score requirements – FHA does not overlook poor credit entirely, but gives those who have made credit mistakes a chance to qualify. Credit score requirements for an FHA loan can vary by lender.
- Small reserve funds – While conventional mortgages require that buyers to have a reserve of funds in the bank so they can pay the mortgage in case of unemployment or other unexpected circumstance, FHA only requires that buyers have one month’s worth of reserves on-hand. This allows those who don’t have as much cash available, to qualify.
- Help with closing costs – FHA loans allow a seller to contribute a larger amount towards closing costs than with a conventional loan. This amount may be enough to cover all, or most, of the closing costs.
- Assumability – FHA loans are assumable, meaning that in the future, a buyer could simply take over the loan instead of getting their own mortgage. This would allow for a future buyer to have a lower interest rate if rates were to increase.
- Larger debt-to-income (DTI) ratios – FHA loans will generally allow for a higher DTI ratio than conventional loans. This can be beneficial to recent college graduates with a lot of student loan debt, for example. To calculate a debt-to-income ratio, divide the monthly debt payments by gross monthly income.
There has to be a downside…
While FHA loans have many benefits, some of the downsides include:
- Mortgage Insurance Premium and Upfront Mortgage Insurance Premium – In order to protect the government, FHA loans require a Mortgage Insurance Premium, which is charged monthly,
and can cost nearly double what Private Mortgage Insurance is on a conventional loan. FHA loans also require an Upfront Mortgage Insurance Premium for the cost of insuring the loan.
- Loan limits – The limit on how much money can be borrowed is much lower for an FHA loan. The loan limits depend on where a home is located.
- Property standards – FHA loans require stricter standards for a property’s condition than conventional loans. A fixer upper or a home that would require costly repairs immediately, may be ineligible for an FHA loan.
Despite the fact that there are extra mortgage insurance costs, loan limits, and stricter property standards than conventional loans, FHA loans are a great option for first-time homebuyers, college graduates with student debt, those looking for a lower down payment option, buyers who have made a few credit mistakes, and first-time homebuyers.
If you’re interested in an FHA loan or would like to discuss your options, our partner, Mortgage Center, is here to help. To get started, contact Doug Blodick (NMLS# 32032) from Mortgage Center by calling 248-849-9470 or email him at email@example.com.
Information as of February 2019.
Equal Housing Lender
Mortgage Center NMLS# 282701
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