An FHA loan is a type of mortgage that is backed by the Federal Housing Administration (FHA) and is designed to help borrowers with lower credit scores or those who can’t afford a large down payment. The FHA insures the loan, which means that lenders are more willing to offer loans to borrowers who might not qualify for conventional loans1.
One of the benefits of an FHA loan is that it allows for a lower down payment than most conventional loans. The minimum down payment required for an FHA loan is 3.5% of the purchase price. FHA loans have more lenient credit score2 requirements than conventional loans, making them a good option for borrowers with less-than-perfect credit. With higher debt to income ratio allowances3, borrowers may increase their borrowing/buying power by using an FHA loan.
However, one potential drawback of an FHA loan is that it requires mortgage insurance premiums4 (MIPs) to be paid upfront and annually. This can add up to a significant amount over time and may make the loan more expensive in the long run.
There are numerous benefits and advantages in utilizing the FHA loan program and may be a good option for borrowers who are challenged in certain aspects. Working with a knowledgeable professional to weigh the pros and cons of an FHA loan against other types of loans to determine which one is right for you is a critical step in your quest for homeownership.
1. See Conventional Loans: What is Fannie Mae and Freddie Mac?
2. See Credit Scores and more.
3. See Mortgage 101
