What kind of loan should you get? Conventional or FHA? Here are some advantages of FHA loans to help you make your decision.Verify my mortgage eligibility (Apr 17th, 2021)
What is a FHA Loan?
Federal Housing Administration (FHA) loans are loans backed by the government. The intent is to protect lenders so that they can offer loans to higher-risk individuals, who might not qualify for conventional loans. This mostly means people with lower credit scores and first-time buyers who can’t sell one home to make the down payment on the next.
So, what are their advantages of FHA loans?
Lower Credit Score Required
To qualify for an FHA loan you need a credit score of 580 or above, compared to 620 required by conventional lenders. The down payment is 3.5%, and the loan allows contributions to be made by third parties to the down payment. You can even get a mortgage with a lower score if you can manage a 10% down payment. Most conventional loans require a down payment of between 5% and 20% unless you have a really good credit score.Verify my mortgage eligibility (Apr 17th, 2021)
FHA loans are much cheaper for people with only average credit, and may be the only kind of loan you can get. While you should still work to improve your score, getting an FHA loan can let you buy a home without waiting until you have cleared as much of your other debt.
Higher Debt-To-Income Ratio
FHA loans also allow a higher debt-to-income ratio, up to 43% including your new mortgage. This basically means that up to 43% of your income can go towards paying down debt. With conventional loans, the ratio is generally limited to 36%. This can be particularly helpful for people with high student loans. They also have relaxed underwriting guidelines, so if you have had a foreclosure or bankruptcy, you may be able to get a FHA loan faster than a conventional one. In other words, your existing debt will have less of an impact on your ability to get a new loan.
You should still, of course, try to keep your debt-to-income ratio as low as possible. Furthermore, it’s generally recommended that housing takes up only 33% of it. Don’t treat an FHA loan as a license to buy more houses than you can afford. Remember that DTI includes all of your debt, including typical credit card payments, car payments, etc.Verify my mortgage eligibility (Apr 17th, 2021)
Rates on FHA loans are generally lower than conforming or conventional loans. They are also not risk-based. With a conventional loan, the lower your credit score, the higher your interest rates. With FHA-backed loans, borrowers with poor credit are not penalized. This means that you don’t have to worry about your credit score as much. This reduces the total cost of your mortgage over time. Paying as little interest as possible is a no-brainer.
The flip side is that if you have excellent credit or improve your credit, you won’t be rewarded, but for most borrowers the rates are going to be lower. However, you can get around this by refinancing to a conventional loan once your credit improves. This can also let you escape the mortgage payments that help lenders reduce their risk.
A FHA loan may be your only option if you have a low credit score and/or can’t afford to pay a high down payment. If you aren’t sure, you should talk to your broker or lender and go through the math with them to work out what kind of mortgage you should get. Atlantic Home Mortgage offers both FHA and conventional loans. Contact us to find out what you can qualify for and let us help you decide whether a FHA loan is right for you.