FHA-backed loans typically have lower income and credit score requirements than conventional mortgages. FHA also requires a minimum 3.5 percent down payment, which is helpful for buyers who don’t have a lot of funds saved for a big lump sum payment. These are two reasons FHA loans are so popular among first-time homebuyers, people on tight budgets and folks who have lower credit scores.
FHA loans do require FHA mortgage insurance for homebuyers who put down less than 20 percent. All FHA borrowers must pay two insurance premiums: the upfront mortgage insurance premium (1.75 percent of the base loan amount) and an annual mortgage insurance premium. The annual premium is based on loan terms, loan amount and the loan-to-value ratio. Keep these extra costs in mind when you’re budgeting for a house.
Who is a FHA Loan for?
A FHA loan can be a viable path to homeownership for many types of buyers. Here we’ll look at two scenarios where FHA loans might make sense.
Borrowers with a sub-620 credit score
Most lenders call for a minimum credit score of 620 for conventional loans, whereas FHA loans have looser requirements. Homebuyers can have a score as low as 500 and still be eligible for an FHA loan. However, lower scores also mean higher down payments. Here’s what FHA requires:
- 580 credit score to qualify for a 3.5 percent down payment
- 500 to 579 credit score must have a minimum 10 percent down payment
Borrowers with a low down payment
Many of today’s buyers, especially if this is their first home, find saving for a down payment challenging. As housing costs rise and people are saddled with student loan debt, many folks need a loan with low down-payment requirements.
FHA loans only require 3.5 percent down (if you have a minimum 580 credit score). This is good news for folks who would otherwise be required to make a larger upfront payment. To obtain approval for a FHA loan, the borrower must satisfy the following requirements.
FHA Loan Requirements
- Steady employment history
- Ability to pay
- Financial soundness
- Residency
| FHA Loan | 30-Year Fixed Loan | |
|---|---|---|
| House price | $300,000 | $300,000 |
| Loan amount | $294,750 | $289,500 |
| Interest rate | 3.31% | 3.32% |
| Principal + interest | $1,292 | $1,271 |
| Mortgage insurance | $205 | $121 |
| Total monthly payment | $1,497 | $1,392 |
Advantages of FHA Loans
- Low down-payment requirements.
- Amenable to first-time home buyers (includes those who have not owned a home for at least three years).
- Financing for mobile homes and factory-built homes.
- May accommodate people who own the land where the home will be located and those who will live in a mobile home park.
- Can lock in a low rate without a large down payment.
Disadvantages of FHA Loans
- FHA borrowers are required to pay two types of mortgage insurance: mortgage insurance premium (MIP) and an annual premium.
- FHA loans require that the house meet certain standards, which decreases buying options.
For more information on FHA loans:
Everything to know about FHA loans