We’ve written before about the differences between conventional and FHA loans, and now the Cushing Team at Guild Mortgage in Reno is back with a closer look at the latter. FHA loans can help prospective homeowners who may have difficulty securing a loan with conventional lenders, and they have a number of features that make them a good option for the right borrower. If you’ve ever wondered about FHA loans, here’s what you should know.
A Quick Definition
The U.S. Federal Housing Administration (FHA) is a government agency that was created in 1934 during the Great Depression. It provides mortgage insurance to lenders, meaning it guarantees home loans. This guarantee means lenders are willing to offer mortgage loans to people that may otherwise not qualify.
Advantages of FHA Loans
FHA loans can offer prospective homeowners a number of potential advantages.
- Less stringent credit requirements: To be eligible for an FHA loan, borrowers need a credit score of 500. Borrowers with a credit score above 580 can also qualify for a 3.5% down payment option. However, lenders can also set their own requirements here, so it’s worth speaking with a professional about your score and eligibility.
- Easier debt ratios: Conventional loan qualifications often include a debt-to-income ratio of no more than 36% of your income. With an FHA loan, that ratio is a little more forgiving at 41%.
- Better interest rates: Lower credit scores can mean higher interest rates. FHA rates don’t change and are typically quite competitive.
On the Downside
While FHA loan eligibility requirements are more forgiving, there are a few potential disadvantages too.
- Interest rates: Because interest rates are the same for all FHA loans, borrowers with good to great credit won’t be able to enjoy the benefits of a lower interest rate.
- Mortgage insurance: The lower down payment associated with an FHA loan means spending more on private mortgage insurance (PMI). Plus, borrowers are required to pay a mortgage insurance fee upfront. While financing is an option, it means higher monthly payments.
- Inspection standards: FHA-eligible properties are identified with a property standards inspection, which can limit your options and make securing an FHA loan on a fixer-upper home tricky. That’s also true for qualifying condos.
- Fewer loan options: Conventional loans have a much wider range of options that simply aren’t available when you’re looking at an FHA loan.
FHA loans may not work for everyone, but for the right borrower, they can be the ticket to home ownership. If you’re interested in learning more about FHA loans, the Cushing Team at Guild Mortgage can help. Contact us today — we’re happy to answer all of your questions.