15 Sep WHAT IS A FHA LOAN?
An FHA loan puts homeownership for many Americans who wouldn’t otherwise qualify for a conventional, non-FHA-backed mortgage. It helps first-time and lower-income buyers purchase a home.
Advantages of an FHA loan
- You can make a lower down payment! With an FHA loan, your down payment may be as low as 3.5% of the home’s purchase price.
- Your credit doesn’t need to be perfect. FHA loans also offer a bit more flexibility for most credit score.
- You can have more debt: As with credit scores, you may be able to get an FHA loan with higher debt-to-income ratio, or DTI. If the ratio of your monthly debt payments to gross income is higher than 50%, you may have a hard time getting a conventional loan.
- Someone can gift you all the money for closing costs: Unless you put at least 20% down, you’ll need to use at least some, if not all, of your own money for the down payment on a conventional loan. In most cases, with an FHA loan, all of your down payment can come from a gift, though you will have to document the source.
Disadvantages of an FHA loan
- There’s an upfront mortgage insurance premium: When you get an FHA loan, you’ll have to pay up 1.75% of the loan amount, which will then be rolled into your payments. This isn’t the case with conventional mortgages.
- You’ll always have to pay monthly mortgage insurance: With conventional loans, you won’t be required to pay private mortgage insurance, or PMI, if you have a traditional 20% down payment. With FHA loans, an annual mortgage insurance premium is required every month — and this is in addition to the upfront premium — for a minimum of 11 years.
- There is a cap on how much you can borrow: Loans are capped at a set limit that varies depending on where you live.
- Inspection standards can be strict: All homes financed with an FHA loan must meet extensive FHA minimum property standards, which evaluate the safety, security, and structural integrity of a home. Your loan won’t be approved until any issues that run afoul of these standards are remedied.