Looking to buy a home? If so, then you’re probably in the process of exploring your financing options. One popular mortgage option that you won’t want to overlook is that of a Federal Housing Administration (FHA) loan, which is especially popular among first-time buyers.
Specifically, an FHA loan is one that is backed by the United States Federal Housing Administration. Most FHA loans come with 30-year fixed interest rates and a low down payment. By exploring the benefits and possible drawbacks of FHA loans, you can determine whether this mortgage type may be right for you.
Advantages of FHA Loans
One of the main reasons buyers (and especially first-time buyers) gravitate towards FHA loans is the low down payment required. In fact, many applicants of FHA loans qualify for a down payment of as little as 3.5% of the total purchase price. This means that if you buy a $200,000 home, you will only be required to make a down payment of $7,000.
Meanwhile, FHA loans are relatively easy to qualify for. Compared to other types of home loans (including conventional loans), a higher debt-to-income ratio is permitted—as is a lower credit score. In fact, it is possible to qualify for an FHA loan with a credit score of just 580. Meanwhile, FHA loans still offer competitive interest rates at fixed thirty-year terms for your peace of mind.
Potential Drawbacks of FHA Loans
Of course, FHA loans are not for everybody. One of the biggest disadvantages of having an FHA loan is that you will need to carry private mortgage insurance (PMI) until you have paid off at least 20% of your loan balance. Unfortunately, PMI can easily tack hundreds of dollars a month onto the cost of your mortgage. And if you make the minimum 3.5% down payment, it could be a long time before you’re able to get rid of your PMI.
The Final Word on FHA Loans
With forgiving qualification requirements and a low down payment, FHA loans are a sensible option for many borrowers. Just be sure to account for PMI when calculating your monthly mortgage payment before deciding on an FHA loan for your home purchase. Happy house hunting!