Are you a first-time homebuyer? Are you trying to figure out whether an FHA loan is right for you or not?
We are here to guide you through each step so you can fully understand what an FHA loan is and how you can apply and qualify for it. So let’s delve deeper to find the answers to all your FHA-related questions below.
What is an FHA Loan?
An FHA loan is a type of home loan that is secured by the FHA – Federal Housing Administration. It is easier to qualify for an FHA loan than for a conventional home loan. To qualify for the FHA loan, you don’t need to have an extensive or strong credit history.
Moreover, it also requires a minimum down payment of 3.5% of the total property price, which makes FHA loans a popular choice, especially among first-time home buyers.
The basic requirements to apply for an FHA loan are as follows:
- A credit score of 580 or higher,
- A minimum down payment of 3.5%,
- A debt-to-income ratio of 43% or less, and
- The property should meet FHA property requirements and must be your primary residence.
The Federal Housing Administration (FHA) insures mortgages issued by banks, credit unions, and other non-bank lenders, and the insurance protects the lenders in case of default. Given this insurance, FHA lenders allow more favorable terms and conditions to borrowers who otherwise might not qualify for a conventional home loan.
What are the Differences Between an FHA Loan and a Conventional Loan?
There are several differences between an FHA loan and a conventional loan. Let’s take a closer look at the differences to better understand what an FHA loan is and how it is different from a conventional one.
The Difference in Minimum Down Payment
An FHA loan requires a minimum down payment of 3.5%, whereas a conventional loan requires a standard minimum downpayment of 20%,
The Difference in Credit Score
An FHA loan requires a low credit score of 580 to qualify for the loan. You can also qualify with a lower credit score (ranging between 500 and 579); however, in that case, your minimum downpayment will go up to 10%. On the other hand, for a conventional loan, you need to have a credit score of at least 620 to qualify for the loan.
The Difference in Closing Costs
An FHA loan may involve closing costs which is often not the case with conventional loans.
What are the Pros and Cons of an FHA Loan?
While an FHA loan may seem like a cost-effective and easy-to-access loan solution, it involves a few trade-offs that you should know. Let’s delve into the pros and cons of an FHA loan.
Benefits of an FHA Loan
Some of the benefits of an FHA loan are as follows:
- Allows you to make a down payment of as low as 3.5%,
- Requires a low credit score than conventional loans, and
- Allows for a debt-to-income ratio of as high as 43%.
Drawbacks of an FHA Loan
A few drawbacks involved with an FHA loan include the following:
- A lower down payment calls for mortgage insurance that lasts for the entire term of the loan,
- Requires the property to meet all the safety and health standards,
- The loan amount cannot exceed the certain limit that is set for the area,
- FHA interest rates and other costs (such as fees and closing costs) may vary according to the lender, so you need to make a wise choice.
How to Apply for an FHA Loan?
If you are planning to apply for an FHA loan, you will need to submit the following personal and financial documents, including:
- A proof of your citizenship in the U.S.,
- A valid Social Security number and
- Bank statements for at least the last 30 days or more depending upon your lender’s documentation requirements. You will also need to provide proof of documentation for any deposits made during that period.
Apart from these documents, your lender may also request or automatically retrieve some other information, including your tax returns, credit report, and employment records. If you are a student or do not have any credit history, you may require some additional paperwork.
How Do You Qualify for an FHA Loan?
You can qualify for an FHA loan with a 3.5% down payment if you have a credit score of 580. You can still qualify for an FHA loan with a credit score ranging between 500 and 579; however, in that case, you will have to make a down payment of 10%. Moreover, you can qualify for an FHA loan if your debt-to-income ratio is less than 43% and the home that you intend to purchase in your primary residence.
An FHA loan is a popular mortgage choice, especially for first-time homebuyers. However, before you opt for an FHA loan, it is critical to be familiar with all the loan requirements and the pros and cons of an FHA loan so you can make the perfect choice for yourself.