An FHA loan provides a government-insured loan with flexible loan options. Even experienced homeowners may need to plan for a long time for a new home purchase. Fortunately, FHA loans may help some buyers get into the home of their dreams with a lower down payment.

What is an FHA loan?

FHA loans are mortgages backed by the U.S. Federal Housing Administration. Lenders, such as banks and credit unions, that provide FHA loans provide funding for home purchases while requiring a lower down payment. Buyers may get into a new home with as little as 3.5% down.

Using conventional loans, a lower down payment requires the borrower to get private mortgage insurance. This special type of insurance protects the lender just in case the borrower is not able to pay. The cost of PMI is added to the monthly payment until the amount of the loan reaches 20%. FHA loans, on the other hand, do not require PMI because they are backed by the U.S. government. Additional scrutiny is often required during the loan application process using an FHA loan.

What is required for an FHA loan?

Many of the same documents are required for an FHA loan that any potential lender will want to see: employment history, appraisal, debt-to-income ration. A few additional stipulations are also attached to the FHA loan process. Buyers may have to bring 3.5% of the purchase price as a down payment, more if they have a credit score below 580. FHA loans are only available for the borrower’s primary residence.

Credit requirements may also be lower for FHA loans, given other factors demonstrate that the borrower is able to manage their money responsibly. Each lender looks at individual applications and may ask for additional documentation or explanations. They are often able to work with buyers with a lower credit score or shorter credit history than in other situations.

How FHA Loans Work

• Purchase your home with as little as 3.5% down payment (compared to 20% required on most loans).
• 30-, 25-, 20- and 15-year terms are all available with fixed rates.
• 5-year adjustable rate mortgage available.
• Pay your mortgage off at any time without pre-payment penalties.

FHA LOAN VS CONVENTIONAL

1. Lower Credit Score Requirements: FHA loans typically have more lenient credit score requirements compared to conventional loans, making them accessible to borrowers with lower credit scores.
2. Lower Down Payment: FHA loans usually require a lower down payment, often as low as 3.5% of the purchase price, compared to the 5% to 20% typically required for conventional loans.
3. Gift Funds: FHA loans allow for the down payment and closing costs to be covered by gift funds from family members, while conventional loans may have stricter rules regarding the source of funds.
4. Assumable Loans: FHA loans are assumable, which means that if you sell your home, the buyer can take over your FHA loan, potentially making your home more attractive to buyers.
5. Flexible Qualification Criteria: FHA loans may be more flexible in terms of income and debt-to-income ratio requirements, making them easier to qualify for in some cases.
6. Mortgage Insurance: FHA loans require mortgage insurance premiums (MIP) for the life of the loan, whereas conventional loans may require private mortgage insurance (PMI) until you reach a certain level of equity in the home.

It’s important to carefully consider your financial situation and goals when choosing between an FHA loan and a conventional loan to ensure you select the option that best suits your needs.

Have questions?  Give us a call!  One of our mortgage specialists would be happy to answer all of your questions.

**Barrett Financial Group is not affiliated with or acting on behalf of or at the direction of FHA, VA, USDA or the Federal Government.