Is An FHA Loan Worth It?

April 9, 2021 by Susan Paige

For potential homeowners who qualify, a federally insured FHA loan is a home loan that requires as little as 3.5% down payment. But for those who take advantage of the minimal down payment, you will likely look at having to pay mortgage insurance as a protection for the lender, possibly making this loan type more expensive than other options.

The Federal Housing Administration insures an FHA loan for borrowers who are often pursuing a 

first-time home buyer loan for the first time. Still, these are also beneficial for those with less than perfect credit. The mortgage is generally easier for applicants to qualify for compared to a conventional loan because the government backs them.

Despite these considered among the best mortgage options, it’s still necessary to shop loans because each lender will offer unique terms and conditions, meaning costs will differ from place to place.

Are FHA Loans Worth It?

Borrowers can take advantage of FHA loans not only for buying a house but for refinancing or remodeling existing homes. You’ll find the loans to be federally backed, but this is not a benefit for you as the consumer but more so for the lender as protection in cases of default.

Each lender will carry their own terms and conditions, which will have a basis on credit score and the amount you put down on the loan. Look for details on FHA loans at https://www.nerdwallet.com/article/mortgages/fha-loan/. Standard qualifying requirements across the board include:

  • Credit base: While the FHA helps first-time home buyers and those with a lower than average credit score, there is a base limit to how low the score can be. For no less than a 3.5% down payment, minimum credit can fall to 580 and still qualify for the loan type. If you falter to a score of no less than 500, you can still be eligible for FHA, but you would need to put up a 10% down payment.

While this mortgage is a good option for first-time home buyers, it’s ideal for anyone dealing with imperfect credit hoping to begin to repair their financial situation with the purchase of a home.

  • Debt/Income Ratio: The typical allotment for total debt for the month, including your mortgage, compared to your gross income, currently stands at 43%. Anything over that amount will disqualify you for a home loan of this type.

The lender will take the time and effort to confirm the debt ratio against the monthly income and compare that to the value of the property lined out for purchase in making their determination. Interest rates, terms, and conditions will be different for each provider. It’s essential to research to learn which might be most beneficial for your specific needs.

With this mortgage option, financial gifts are permitted, as is assistance with down payments as long as all of the necessary mortgage requirements have been considered. Most conventional loans don’t allow gifting with down payments. 

The premium set for the loan will likely be consistent for the life of the loan. If you choose a fixed rate, the fee won’t raise or lower depending on the index. You can also opt for an adjustable-rate allowing for potential adjustments periodically. These could have a lower rate initially going up over time by as much as 1% annually.

You have an opportunity to receive as much as 6% help from the sellers for closing costs, where most conventional lenders will cap that number at 3%. View the fundamentals of FHA loans here.

Final Thought

An FHA is the mortgage option most first-time home buyers strive for because of the benefits it provides to new homeowners with down payment assistance, closing costs, and the leniency it offers concerning credit scores. There are alternatives in the USDA, VA, and conventional loans. Each has its own stringent requirements and terms and conditions that need meeting, plus pros and cons. 

Often it’s helpful to speak with a mortgage broker to help guide you towards the best loan for your particular situation, particularly if you have difficulty determining which is the ideal type for you. Still, certainly put forth a great deal of research and shop carefully before ultimately making a full-on commitment.

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