The Ins And Outs of FHA Home Loans: What To Know Before You Apply

Federal Housing Administration (FHA) loans are government-backed mortgages insured by the Federal Housing Administration, hence the name (FHA). Since the government insures FHA loans, lenders feel more comfortable taking on various customers, allowing you, the borrower, greater flexibility in satisfying certain loan conditions, such as credit score and debt-to-income ratio (DTI). You may still qualify for an FHA loan even if you are not the ideal financial fit.

For some, this increased loan qualification flexibility may be just what they need to finally become a homeowner, while for others, a traditional loan may be more than adequate. Let’s examine precisely what FHA loans can offer and in what circumstances an FHA loan may be appropriate for you.

Understanding Pros and Cons of FHA Home Loans Before Your Apply

Before you apply for FHA home loans, it is vital to understand their ins and outs. 

Pros of FHA Home Loans

Low Initial Payment

A low down payment requirement is one of the most enticing features of an FHA loan. Finding a lump sum of cash sufficient to cover the down payment on a home – generally 20% – can be a daunting task for many, and it is frequently the most significant barrier to homeownership. With an FHA loan, however, homebuyers with a credit score of 580 or better can put as little as 3.5% down.

Better Rates

Mortgage rates are dynamic and influenced by the status of the economy as a whole, but you can still take steps to reduce them. FHA loans often offer lower, fixed annual percentage rates (APRs) than other types. Adjustable-rate loans are also available.

Your APR will be based on the general market rate at the time you apply for your loan, but your income, credit score, the amount you intend to borrow, your down payment, the term, and other factors will also impact your rate.

Less Stringent Lending Standards

Conventional loans have stricter standards for credit scores, debt-to-income ratios, and down payments than FHA loans. This implies you can acquire a home regardless of your financial situation.

No Private Mortgage Insurance

If you have less than a 20% down payment, conventional mortgages require you to purchase Private Mortgage Insurance (PMI). PMI fees typically range from 0.2% to 2% of the loan amount. However, PMI is not required for FHA loans.

Cons of FHA Home Loans

Mortgage Insurance

Yes, you are not required to pay PMI. FHA loans need a different mortgage insurance premium equal to 1.5% of the loan amount at closing. The annual charge ranges from 0.45% to 1.05% of your mortgage. If you’re undecided between a conventional mortgage and an FHA loan, calculate PMI and FHA mortgage insurance to see which will be cheaper.

Minimum 3.5% Down Payment

This is still a modest minimum down payment requirement. But if you’re trying to come up with a 3.5% down payment, you should explore a USDA or VA loan. These are two more government-backed loans; if you qualify, you may not require any down payment.

Borrowing Restrictions

FHA loans limit your borrowing to a set amount, which could prevent you from purchasing the home of your dreams.

Minimum Property Requirements

Your FHA loan application will be denied if your home has serious structural or safety issues or if it is located in a close proximity to a noisy location, such as an airport or industrial area. These limits may prevent you from purchasing a significant fixer-upper or a residence in a particular neighborhood. 

Wrapping Up

FHA loans have advantages and disadvantages; whether they are ideal for you depends on your financial circumstances. Your credit score, available funds for a down payment, and income, among other factors, will impact the deal you get. But an FHA mortgage could be a terrific choice for those without stellar credit history or those trying to save enough for a down payment.

If you’re ready to take the next step in the process of purchasing a home, visit Heritage Financial Credit Union to get pre-approved.