Is an FHA Loan Right for Me?
You have heard a lot about FHA loans, but how do you know if it is the right loan type for you?
FHA Home Loans: The Basics
FHA loans are mortgages issued by an approved lender, but unlike conventional mortgages, are insured by the Federal Housing Administration. FHA-insured loans require a lower down payment and less stringent credit requirements, making them especially attractive to first-time home buyers.
As of 2019, you can obtain an FHA home loan with 3.5% down and a credit score of 580. On the other hand, a conventional mortgage typically requires 5-20% down and a credit score higher than 620. If you’re putting down 5% or less and your credit score is between 580 and 699, an FHA home loan will make more sense than a conventional. Consult our mortgage calculator to see how much of a down payment you can afford.
But finding a best-fit loan is not always about down payments and credit scores. Future plans and the type of home should come into consideration when deciding if an FHA home loan is right for you.
How Long Will You Stay?
Whether you go with a conventional or FHA loan, you can expect to pay mortgage insurance when putting less than 20% down on a home. Once a conventional mortgage reaches 80% of the loan-to-value ration, the mortgage insurance can be removed. With an FHA loan, however, the borrower will pay monthly mortgage insurance for a minimum of 11 years. (But meeting that minimum requires a 10% down payment).
Over time, mortgage insurance premiums can make FHA loans more expensive than conventional loans. But if you plan on owning the home for less than 11 years, an FHA monthly mortgage insurance premium will not matter as much. This leaves the borrower room to focus on other comparisons, such as interest rates.
What Kind of Home are you Buying?
While FHA loans can make the approval process easier for you as a borrower, they can also place more restrictions on you as a home buyer. For example, a very limited number of condominium projects are eligible for FHA-insured financing due to stringent approval requirements. (Although, recent policy change will soon make condos more accessible to FHA borrowers.)
Also consider where and why you are buying. Before taking out an FHA loan, minimum property standards must be met. This sometimes causing a hassle for the seller. Sellers in highly competitive markets may be more apt to entertain offers from conventional borrowers than FHA-insured borrowers. Are you looking to rent out the property? The FHA typically requires the property to be owner-occupied and your principal residence. If you are looking to purchase an investment property, a conventional mortgage may be your only route instead of an FHA loan.
Navigating loan types is not something you have to do alone. Meet with a mortgage banker to help you determine which option is best for you.