An FHA loan is a special type of mortgage-backed by the Federal Housing Administration. These types of mortgages are popular with first-time homeowners because they require much lower down payments than conventional mortgages typically do.
FICO Score and Down Payment Differences
These FHA loans also are available to people with much lower credit scores than are required for conventional mortgages. For example, with a 10 percent down payment, a borrower with a FICO score of 500 could be approved for an FHA loan, whereas someone with a 20 percent down payment and a 610 FICO score would probably be rejected for a conventional mortgage loan.
To obtain the maximum FHA financing, you will need a FICO score of 580 or better, and a down payment of 3.5 percent. You will need to pay private mortgage insurance with an FHA loan, whereas you can get out of paying for this if you provide a down payment of 20 percent with a conventional mortgage loan. This private mortgage insurance protects the lender if you default on the loan, which enables them to take on higher risk borrowers.
How do FHA Loans Compare to Conventional Mortgages?
FHA loans typically require a down payment of 3.5 percent, while conventional mortgages require a down payment of 5 to 20 percent, with an absolute minimum of 3 percent. FHA loans are available as fixed-rate loans with terms of 15 or 30 years, while conventional mortgages are available with either variable or fixed rates and duration of 10, 15, 20, or 30 years. Private Mortgage Insurance (PMI) premiums for conventional mortgage loans range from 0.5 to 1 percent of the loan amount per year. Those for FHA loans range from 0.45 to 1.05 percent per year, plus 1.75 percent upfront.
Who is the Best Candidate for an FHA Loan?
If you are not able to save up the full 20 percent down payment (or even as little as 5 percent) for a conventional mortgage, you could be a good candidate for an FHA loan. FHA loans also tend to work for first-time home buyers and those with low to moderate incomes. First time home buyers are also good candidates for an FHA loan. You can still get an FHA loan as a non-first-time home buyer, as long as you will be using the residence as your primary home.
What if I Have Poor Credit Or Little Credit History?
FHA loans can be granted to people with lower than average scores, such as those in the range of 500 to 580. If your FICO score is lower than 500, you will not be eligible for an FHA loan. However, there are certain exceptions. For instance, if you lack sufficient credit history or have nontraditional credit history, you might be able to qualify through an exception. You will need to talk to an FHA loan specialist or lender to see if you’re eligible under these circumstances.
How Much Do I Need For A Down Payment?
FHA loans require a down payment of 3.5 percent of the home’s purchase price, or 10 percent if you have a FICO score of 500-579. For example, if you purchase a home worth 180,000, you will need a down payment of $6,300 in cash. If you are unable to come up with this down payment, you may be able to obtain assistance through state, city, county, or local housing authorities, or a nonprofit. You can also use a gift from family members or a government grant to make your down payment with an FHA loan.
Will I Need To Pay Closing Costs?
Unlike conventional mortgages, there are hard limits placed on the closing costs lenders can charge FHA borrowers. These limits are enforced by HUD (Housing and Urban Development). The limits range from 3 to 5 percent of the total loan amount and vary from state to state and loan to loan.
The FHA lets home sellers, builders, and lenders pay some of the borrower’s closing costs, including things like appraisals, credit reports, and title costs. For instance, a builder might cover closing costs to incentivize borrowers to buy their newly constructed homes. If a lender covers closing costs, they will typically increase the interest rate they charge to make up for it, so keep this in mind. You can comparison shop offers from competing lenders to see who offers the best deal.
Where Can I Get An FHA Loan?
The FHA themselves do not issue FHA loans. Instead, they work with an approved network of lenders who issue the loans, which are then backed by the FHA. As with conventional loans, each lender will have its rates and costs, even for the same loan from person to person.
FHA loans are issued through a wide variety of lenders such as local and national banks, credit unions, and independent mortgage lenders. As with any competitive product, be sure to shop around before committing to anything to ensure you get the best deal.