Is An FHA Loan The Best Option For You?

FHA loans are mortgages that are insured by the Federal Housing Administration (FHA), which is an agency of the federal government within the Department of Housing & Urban Development (HUD).  Because the mortgages are insured by FHA, protecting lenders against buyer default, lenders can offer FHA loans at attractive interest rates with more flexible and less stringent qualification requirements.  

Here are some facts you should know about FHA loans:

In order to secure an FHA loan, you must use an FHA-approved lender.  Not all lenders are FHA-approved.  Not all FHA-approved lenders have the same requirements and costs.  As a buyer, you should shop around for the combination of up-front costs, closing costs, and monthly payments that best fits your situation.  Loan officers are experts at determining which program best suits a buyer based on their unique combination of financial factors.

You don't need to have perfect credit to qualify for an FHA loan.  FHA does not mandate a minimum credit score, and they do have some flexibility in determining the credit-worthiness of a buyer based on their circumstances.  However, many lenders set their own minimum credit score requirements.  If your credit is not great, it is best to explain your situation to the loan officer so they can best help you.  Some buyers who suffered foreclosure, bankruptcy or short sales in the past, but have since re-established themselves from the situation that caused the hardship, are able to get FHA loans without waiting several years.

The minimum down payment required is 3.5% of the purchase price of the home.  This money can come from the buyer's own savings, can be a gift from a family member, or can be a grant from a government down-payment assistance program.  This is one of the big advantages of an FHA loan, and one of the main reasons buyers may choose an FHA loan with higher costs over a conventional loan with lower costs but larger down payment requirements.

Home sellers and builders may pay some of the buyer's closing costs.  Closing costs such as the cost of the appraisal, credit report, and title charges can be paid by the seller or builder.  This is pretty commonplace on FHA loans and helps the buyer qualify by requiring less cash up front.

Two mortgage insurance premiums are required on all FHA loans.  (1) The up-front premium of 2.25% of the loan amount is paid when the buyer gets the loan, but can (and usually is) rolled into the loan amount.  (2) The annual premium of .55% of the loan amount is paid monthly, with 1/12th of the amount paid each month, included in the buyer's monthly mortgage payment.

FHA loans are an excellent option for many buyers, but may have higher costs than conventional loans.  Like anything else, there are advantages and disadvantages to all mortgage loan options.  Rule of thumb, if you have limited funds for a down payment, will be using a gift for the down payment, or need some leeway on your credit score, then you are probably a good candidate for an FHA loan.

Contact us for a referral to some qualified FHA lenders, or to discuss your real estate goals.