Beginner’s Guide to FHA Loans
If you’re a first-time homebuyer, looking to learn more about FHA loans, you’ve come to the right place. FHA loans are great options for buyers with lower credit scores or limited down payment savings. So, what exactly is an FHA loan? From what they are to how to qualify, we’ve broken down everything you need to know about FHA mortgages. Let’s jump in and see if it’s the right loan option for you.
What Is an FHA Loan and How Does It Work?
A mortgage insured by the Federal Housing Administration is known as an FHA loan. FHA loans are popular mortgage choices for first-time homebuyers, people with low credit scores, or those who have small down payments. FHA loans come with a 3.5% minimum down payment, and you can often qualify with a credit score as low as 580. This is a huge help for first-time buyers or those with credit or financial difficulties.
Banks and online lenders can offer these mortgages to buyers because of the support from the Federal Housing Administration. While the FHA isn’t giving the loans, they are insuring them for lenders. In return, banks can provide people with FHA loans with looser qualifications and down payment requirements. Only an approved FHA lender can offer a loan insured by the FHA. This means that not all banks and online lenders can offer FHA loans.
Who Can Qualify for an FHA Loan?
There are a few requirements you’ll need to satisfy in order to qualify for an FHA loan. FHA guidelines require you have a credit score of at least 500. However, if you have a score ranging from 500 to 579, you’ll need a higher down payment. Keep in mind that these are FHA requirements. Individual banks may have their own down payment requirements and qualifications.
To qualify for an FHA loan, you must also put at least 3.5% down. If your credit score is between 500 and 579, however, you’ll need 10% down. You’ll also want to keep an eye on your debt-to-income ratio. This refers to how much debt you have in relation to your income. For an FHA loan, this ratio needs to be below 50%. This means your debt payments each month can’t be more than 50% of your income.
What Is the Downside of an FHA Loan?
If you put 20% down, you aren’t required to pay mortgage insurance with a conventional loan. With an FHA loan, you will need to pay mortgage insurance the entire loan term if you put less than 10% down. Your property must also appraise at the price you’re looking to spend. FHA lenders want to make sure you’re making a good investment. Additional requirements, fees, and loan terms will vary by lender.
Does an FHA Loan Hurt Your Credit Score?
If your FHA loan is in good standing, this will often boost your credit score over time. The longer you pay off your loan, the faster your mortgage goes down. This reduces your debt-to-income ratio and shows creditors that you have a responsible amount of debt. A mortgage is also considered a good debt to have. High-interest credit cards are considered bad debt. Your credit card balance will weigh more heavily on your credit score than a mortgage.
The difference in debt is that homes are looked at as an investment. The debt you have on your home will get lower over time, and your home will more than likely increase in value. Credit cards, for example, aren’t investments. This is why having an FHA loan or a mortgage on your credit is considered good debt that will boost your score over time.
How Much Will an FHA Loan Give You?
In terms of how much you can get for an FHA loan, this will vary depending on where you live. An FHA loan limit in New York or San Francisco, for example, will be higher than less expensive real estate markets in other parts of the country. You can check the FHA loan limit on the U.S. Department of Housing and Urban Development’s website to see what the local limit is where you live.
It’s important to note that FHA loans aren’t available as jumbo loans. This means that you can’t go over the local FHA loan limit set in place. With other conventional mortgages, if your traditional loan limit is reached, you may be able to qualify for a jumbo loan on a high-priced home. This isn’t the case with an FHA loan. There is no jumbo loan FHA option with any lender.
FHA Loans Vs. Conventional Mortgages
While FHA loans and conventional mortgages are both home loans, there are a few key differences between the two. For example, it’s a lot easier to qualify for an FHA loan because of the lower down payment requirements. You’re also able to have a lower credit score. You may also find gifts, grants, and additional down payment assistance are easier to use on an FHA loan than with a conventional mortgage.
Because buyers can put as little as 3.5% down, you will always have to pay some mortgage insurance regardless of your down payment. If you put less than 20% down on a conventional loan, you’ll often have to pay private mortgage insurance (P.M.I.). This acts as insurance in case you fail to pay your loan. Lenders are able to use this to recoup some of their losses on your loan. However, if you put 20% down or more on a conventional loan, you don’t have to pay any mortgage insurance.
Is an FHA Loan Right for You?
If you’re worried about your down payment or your credit score, an FHA loan might be a great option for you. With easier qualification requirements and lower down payment minimums, an FHA loan may be the mortgage you need to make your homeownership dream a reality.