Why would someone choose an FHA loan? Is it right for me? What are the pro’s and con’s of an FHA loan?
FHA loans have more flexible terms, and are great for someone with a credit score under 680, or with little money for a down payment. Many first-time homebuyers use this loan because it has a very low down payment, competitive interest rates, it’s a quick and easy loan, and is widely accepted by Real Estate Agents.
FHA has more of a pass/fail model when it comes to interest rates- meaning they don’t rely heavily on your credit score to determine the interest rate on the loan. They are a government loan (which means they are insured by FHA- Federal Housing Authority if the loan goes into default).
Pro’s to an FHA loan:
- Better offers for people with credit scores under 680, in layman’s terms, you may get a better interest rate, and lower mortgage insurance costs with this loan instead of a conventional loan.
- More lenient debt-ratio than other loans (this could help you qualify for more). FHA allows a higher total amount of MONTHLY debts than other loans.
- Lower down payment requirements, with as little as 3.5%. Plus FHA allows a homebuyer to get a gift for the down payment. (Meaning a family member can GIVE you the money for a down payment. There are certain rules to follow here, but it is VERY common!
- A straight-forward MI (mortgage insurance) cost (not determined by your credit score).
- The PMI does not fall off of the loan automatically like a conventional loan. You must get out of the loan to get rid of the PMI. That means a refinance, pay off, or sell the home.
- There are 2 types of MI for an FHA loan; an Up-front PMI, and a monthly PMI. This can add up, the up-front Mortgage Insurance is 1.75% of the loan amount. (This adds up quickly. In our market, an average loan amount is $350,000, so that would bring this insurance to $6,125).
- A comment on the upfront MI, it is not paid out of pocket- this is something that is financed into your loan, you do pay interest on it, and it does impact your monthly payments, but it does NOT have to be paid out of pocket.
- The mortgage insurance is NOT tax deductible.
- A mortgage loan officer will need to use 1% of your student loan balances to determine your monthly payments. (If you have high student loans, this can add up quickly and it will make a big impact on your debt-ratio.)
Interested in an FHA loan, or want to learn more? Contact us today!