As a prospective starter homeowner, it is understandable that you’re looking for an affordable home loan. Further, if your credit score is not exactly impressive and you have limited funds to offer as down payment, consider opting for an FHA loan. It may interest you to know that around 20% of Americans applied for and acquired FHA loans in the year 2019. In case you’re wondering if this is a suitable option for you, check out these key advantages as explained by the folks at MoneyGeek.
Understanding What are FHA Loans
FHA or Federal Housing Administration loans are mortgages insured or backed by the federal government as defined by Investopedia. Any person wishing to invest in a home can apply for these loans and put down as little as 3.5% of the home value as the down payment. For instance, if you’re considering buying a starter home valued at $100,000, you can pay $3,500 and get a mortgage for the balance amount. The best perk of this loan as against conventional loans is that you can get approved even if you have a high debt-to-income ratio. Or, if you owe more debts as compared to the regular income you earn. You can calculate your DTI ratio by using online tools.
1. Conventional Loans Require a High Credit Ranking
If you wish to apply for a conventional loan, the lending company will require that you have a credit score of at least 620 or higher. Typically, this FICO® score ranges from a minimum of 350 points to a maximum of 850 points. You’ll earn these points based on several factors such as the length of your credit history, and whether you make all payments on time. For instance, toward utilities, credit cards, and any other obligations you have. The kind of credit you use and any new credit accounts you may have started are other factors that reflect on your rating. If you have a high credit ranking, that’s an indication that you’re likely to pay back the mortgage amount. Since FHA loans carry the guarantee of the federal government, you can get approval even if your score is low.
2. You’ll Pay a Lower Down Payment for an FHA Loan
While most conventional loans require you to pay at least 20% of the house value as down payment, the seller could settle for a 10% payment also. In that case, the mortgage provider expects that you’ll also buy private mortgage insurance (PMI). This insurance protects the mortgage provider against the possibility of your defaulting on the loan. You’ll pay the insurance premiums as part of the mortgage payments each month. FHA loans allow you to buy a home with a 3.5% down payment as long as you have a credit rating of at least 580. In short, the lower is your credit rating, the higher will be the down payment you must offer. There are several online tools available that can help you calculate the loan you qualify for and the initial sum you must offer.
3. FHA Loans Carry Low Interest Rates
Thanks to the backing of the federal government, you’ll pay lower rates of interest for FHA loans as compared to conventional loans. Various factors can affect the applicable interest like, for example, the down payment you paid, your credit score, and income. The ongoing market rate, the amount you intend to borrow, and various other criteria can influence the final cost of the mortgage inclusive of interest.
Given a choice between FHA loans and conventional loans, the former has a bunch of advantages for a buyer looking to purchase their first home. Do your homework and weigh your options carefully before investing.