What is an FHA loan? ​

The Federal Housing Administration, which is an agency under the Department of Housing and Urban Development, backs FHA loans. FHA loans are insured by this organization, which means that they protect your lender if you default. They are appealing for borrowers which lower credit or who are seeking to put down less money.

Who qualifies for an FHA loan?

To qualify for an FHA loan, you must meet the following requirements.

• Credit score of 580 or higher (programs available with lower credit scores if you have more money to put down)
• Qualifying debt-to-income ratio of up to 57%
• Only requires 3.5% down payment

FHA loan pros

• More lenient qualifying requirements – You can qualify with a lower credit score, more debt, and a lower down payment . These can typically be daunting obstacles to homeownership. However, with an FHA loan, borrowers can begin building equity sooner, which is why FHA loans can be more attractive to first-time homebuyers.
• Less wait time after bankruptcy and foreclosure – While you may have to wait longer to qualify for a conventional loan, you can qualify for an FHA loan more quickly after any bankruptcy and/or foreclosure.
• Build equity and stop renting earlier – Because of the more lenient requirements, FHA loans help borrowers realize their dream of homeownership sooner. Rather than having to wait for your credit score to improve or save up more for a larger down payment, FHA loans can make their home- ownership aspirations a reality.

FHA loan cons

• You won’t be able to avoid mortgage insurance – Because of the more lenient credit requirements, lenders require more protection in case of default. Because of this, they require an upfront mortgage insurance premiums (which can be rolled into your loan amount) as well as annual premiums which get collected as part of your mortgage payment in 12 installments. If you put the minimum down payment on your loan, you will need to refinance to eliminate your monthly mortgage insurance.
• You could pay more – The annual percentage rate on FHA loans is sometimes higher that on conventional loans. Though the interest rates may be similar to conventional rates, the APR is a better measure of measuring the total loan cost.
• Sellers may overlook your offer – Sellers may view FHA loans as less attractive in an ultra-competitive market.