FHA loans are a popular mortgage option for borrowers who may be looking for alternative qualifying requirements compared to traditional conventional mortgages. This guide explores what FHA loans are and the key benefits to this loan program that make them a go-to option for many borrowers.
FHA loans may be a good option for first time home buyers who are looking to finance their first home but would like to put less down or need more flexible credit score requirements.
What is a Federal Housing Administration (FHA) Loan?
FHA loans are a mortgage option backed by the Federal Housing Administration that can be used to purchase or refinance a primary residence. The Federal Housing Administration insures and sets the qualifying guidelines for FHA loans. Borrowers work with mortgage lenders—like Newfi—who offer these mortgage loans.
FHA loans offer borrowers lower initial down payments and flexible credit requirements. Because these loans have lower down payment requirements, the Federal Housing Administration’s requires borrowers to pay FHA mortgage insurance premiums, also known as MIP.
MIP is a fee that is added onto a borrower’s monthly mortgage payment when a borrower puts down less than 20% on their mortgage. FHA loans require borrowers to pay MIP for the entirety of their loan term.
What Are the Benefits of an FHA Loan?
Lower Down Payment Requirements
Owning a home is a dream for many, but some prospective homebuyers struggle to save enough to provide a down payment large enough for other loan programs. That’s where FHA loan’s 3.5% down payment requirements come in! With a lower down payment option, buying a home becomes more accessible to those who may not have the means to save for a larger down payment.
Flexible Credit Scores Requirements
Securing loans can be challenging for prospective homebuyers who may be working on bettering their credit score. Because FHA loans are backed by the government—which means the loans are guaranteed to be paid back to the lender by the Federal Housing Administration—these mortgages allow for more flexible guidelines.
Whereas traditional conventional mortgage loans may require credit scores in the mid or high 600’s, FHA loans from Newfi can help borrowers with credit scores as low as 580 secure home financing.
What are the Disadvantages of a FHA Loan?
While FHA loans can help many borrowers find accessible home financing, they may not make sense for every situation. Borrowers may want to consider other home loans if:
- They are looking to purchase a home that’s home price exceeds the FHA guidelines for maximum loan amounts.
- A borrower is looking to buy a second home or investment property.
- A borrower would like to avoid paying MIP for the entire length of their loan.
What are Other Low Down Payment Mortgage Options?
Conventional Mortgages offer down payments as little as 3% for borrowers. These mortgages require, borrowers who put down less than 20% will be required to pay for private mortgage insurance. However, unlike FHA mortgage insurance, private mortgage insurance can be cancelled once the borrower has paid off 20% of their home’s value.
VA Home Loans are mortgage loans for borrowers who have served or are currently serving in the military and their families. These mortgages have 0% down payment requirements, no requirement for mortgage insurance requirements, and have lower interest rates.
USDA Home loans are available to low-income borrowers living in rural areas across the United States. This mortgage option has no down payment requirement, but require an annual guarantee fee.
Is an FHA Loan the Right Mortgage Option for Me?
Finding the right home loan can sometimes feel overwhelming. If unsure about which low down payment mortgage makes sense for you situation, we recommend reaching out to one of Newfi’s Senior Loan Advisors! You can reach out to our team here or by phone at (888) 316-3934! They are happy to go over any questions or concerns you have.