Federal Housing Administration (FHA) loans are issued by private lenders but are approved and guaranteed by the FHA. That means lenders are protected in case the borrower defaults. With that, borrowers can easily qualify for a loan despite having a shaky credit history or opting for a low-down payment.
Because of FHA loans, first-time homebuyers can purchase a house much easier and won’t have to worry about large upfront payments. However, FHA loans come with disadvantages too. There is a cap in the amount that you can borrow, and you’ll also need to secure mortgage insurance to utilize the low-down payment. Because of this, FHA loans can become more expensive compared to other types of loans or mortgages.
What is the Difference Between FHA Loans and Other Types of Mortgage Loans?
The main difference between FHA loans and mortgages is that conventional mortgages are not insured by the FHA. Because of the lack of insurance, lenders under conventional mortgages are a lot stricter, making it harder to qualify if you have a not-so-great credit standing or unless you opt for a large down payment.
To compare, FHA loans can offer as low as 3.5 percent down payment whereas conventional mortgages require 5 percent. The FHA also allows financial gifts or assistance as long as it comes from an approved source. With this, up to 100 percent of the down payment can be gifted, unlike conventional mortgage lenders who allow only a set amount of assistance.
What are the Most Notable Advantages of FHA Loans?
With FHA loans, credit scores as low as 500 can get approved, whereas conventional loans only allow a minimum of 640. Also, because of the lower interest rates, loan payments are not as expensive, and they can cost less over time.
Probably the most appealing advantage of FHA loans is that the FHA allows a higher percentage of assistance for the closing cost. Sellers can pay up to six percent of the closing cost, while only three percent is allowed by most mortgage lenders.
What is the Main Disadvantage of FHA Loans?
While FHA loans provide many benefits, they do come with a downside, which is the additional upfront payment of a mortgage insurance premium and annual mortgage insurance premium. Conventional lenders almost always require private mortgage insurance that you only need to pay monthly. Also, FHA loan insurance typically needs to be paid longer.
What are the Qualifications for an FHA Loan?
If you meet the following criteria, you can apply for an FHA loan:
- A credit score of 580 to apply for a 3.5 percent down payment loan
- A 500 credit score but with a 10 percent down payment
- The loan should be used for housing assistance
- The property must be used as a primary home
- Proof of employment
Lastly, your monthly debt payments should be valued at 43 percent of your gross income or lower.
FHA Loans with Desert Springs Mortgage
FHA loans provide flexibility and a better head start assistance for first-time homebuyers, although the FHA doesn’t limit the loan to first-time borrowers. With FHA loans, you can have a more comfortable and more seamless funding process for your housing. However, loan amount and assistance is capped, which means you will need to opt for conventional loans if you’re planning to buy a bigger and more expensive home.