An FHA Loan: Is this the right fit for your situation? — FIbyREI

Is it a good idea to get an FHA loan?

So, is it a good idea to get an FHA loan?

What is an FHA loan?

First, let’s take a minute to understand what an FHA loan is. An FHA home loan is guaranteed by the Federal Housing Administration, a department in the U.S. Department of Housing and Urban Development .

Requirements of FHA loans

One of the attractive features of an FHA loan is the less stringent financial qualifications. As a borrower, the minimum credit score requirement is 580. When compared to other home loan options, this credit score requirement is relatively low.

Do I need perfect credit for an FHA loan?

When you apply for an FHA loan, the lender will not be taking on as much risk since the FHA will guarantee your loan. With that, lenders are more willing to accept less than perfect credit. In fact, you can potentially obtain an FHA loan with a credit score as low as 500.

Conventional loan vs. FHA loan

Although the federal government does not back conventional loans, it doesn’t mean that it is not a good choice for your situation. Here’s are the differences that stand out.

Credit score requirements

In most cases, a conventional loan will require a credit score of 620 or higher from the borrower. Additionally, you may be facing higher interest rates with a credit score that falls on the lower end.

Down payment requirements

Although many borrowers think of 20% as a benchmark down payment for conventional loans, that is not necessarily the case. In fact, conventional loans can come with down payment options as low as 3%.

Private mortgage insurance

Private mortgage insurance (PMI) is a part of your monthly payment to protect the lender in case you default on the loan.

Property condition

The FHA loan has specific requirements for the condition of the property. If the property does not meet these condition requirements, you cannot close with an FHA loan. Although most conventional mortgage lenders have property condition requirements, you might find them less stringent than an FHA loan.

Do FHA loans have closing costs?

Both FHA loans and conventional loans have closing costs associated with them. As you prepare for homeownership, you should expect to pay between 2% and 5% in closing costs. Whether you work with an FHA loan or conventional loan, closing costs can add up quickly.

Should I get or avoid an FHA loan?

An FHA loan can be a good opportunity for the right buyer. A major hurdle that most potential home buyers face is the upfront costs of a down payment. With an FHA loan, it may be less challenging to save for a down payment. Since you’ll only need to put down 3.5% in most cases, this could accelerate your path to homeownership.

Are FHA loans good for first-time buyers?

With low down payment options and less restrictive requirements for borrowers, an FHA loan can be a good option for first-time buyers. You can potentially become a homeowner more quickly with a smaller down payment.

--

--

Host of “The House Hacking Podcast” and owner of www.FIbyREI.com

Love podcasts or audiobooks? Learn on the go with our new app.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Andrew Kerr

Andrew Kerr

Host of “The House Hacking Podcast” and owner of www.FIbyREI.com