Should I Use an FHA Loan?

Unless you have been living in a plastic bubble for the past few months, you know that mortgage rates are higher than they have been in two decades. This was the Feds’ attempt at slowing inflation by raising interest rates to slow demand. Was this a successful approach? That leaves room for opinion. In many cases, with a lower down payment requirement, lower credit score requirement, and desirable terms, FHA financing may be the best option for you to choose. Here are a few key points to consider when weighing your decision.   

What is FHA?

There is a common misconception on this type of loan product. Many consumers think that an FHA loan is funded from the government. The Federal Housing Administration actually backs these loans by insuring them, while not providing the funding directly. Because of this added government support, it allows for more flexible underwriting terms not typical with a conventional mortgage loan. There are definitely some perks to using FHA financing but like most things in life, there’s no such thing as a free lunch. These perks come at a cost. However, depending on your current financial situation, FHA may be the most desirable route for you to go. 

Credit Score Requirement

A desirable feature of this loan product is the lower credit score requirement. Currently, the minimum credit score required for FHA financing is 580. Conventional financing requires more stringent credit score criteria. For those with more challenged credit scores, FHA can be a great alternative to conventional financing. 

Lower Down Payment

Another great perk is the lower down payment. FHA financing only requires 3.5% down. Even home buyers with higher credit scores often consider the FHA mortgage option because of the desirable lower down payment requirement. Credit scores lower than 580 are required to put down a larger down payment to compensate for the credit score deficiency. Again, FHA offers significant flexibility where other loan options do not.

What about PMI?

The thorn in everyone’s side with FHA is the private mortgage insurance required. Again, no free lunch! Since FHA homebuyers typically have less-than-perfect credit, the government sees this as being a higher risk of default. To protect their interest in the loan, they require the homebuyer to purchase Private Mortgage Insurance. There is both an upfront cost and a monthly cost involved in PMI. The good news is, once you have built up at least 20% equity, you no longer are responsible for paying PMI. 

Keep in mind that the home you are purchasing will require an appraisal by a licensed FHA appraiser. These are sometimes viewed to be more substantial than an appraisal performed for a conventionally financed home. There are also limits on the purchase price of the home when using FHA financing. Talk to your trusted loan officer about specifics so you are well informed on all the particulars. Though the path to homeownership may feel a bit daunting these days, feel confident in knowing that there are options out there to fulfill the American Dream.