Buying Your First Home? What to Know About FHA Loans

With so many different home loans that home buyers can pick from, how do you know where to start?Home loans are made with specific uses in mind. It can be easy to get bogged down sorting the options, especially for first-time home buyers and low-income home buyers. Everyone in the mentioned two categories should consider the Federal Housing Administration (FHA) loan. These government-backed mortgages can be the best choice for low-income and first-time home buyers as some of their terms are with them in mind. Get to know more about FHA loans.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

FHA Loan Overview

The Federal Housing Administration was first established in 1934 and has issued loans ever since. To this day, the FHA has backed over 46 million loans to home buyers of all backgrounds. While most people can use FHA loans, they’re especially aimed at first-time and low-income home buyers. This is because FHA loans allow buyers to purchase a home with as little as just 3.5% down instead of 20% like most other traditional loans.

Who Can Use an FHA Loan?

Most people are eligible to use FHA loans. However, there are certain criteria that all applicants need to fit to be approved. The FHA loan requirements include:

• The buyer must have stable employment and income, proven by having held their current job for at least two years.
• The buyer must be able to pay at least 3.5% down and have a minimum credit score of 580.
• The buyer must be at least 18 years old, have a valid Social Security number, and be a legal United States citizen.

The property the buyer wishes to purchase must also meet certain standards. For instance, the home must be appraised by a FHA-approved appraiser, and it must meet all minimum health and safety requirements before loan approval.

Advantages of an FHA Loan

Why should a home buyer use an FHA loan over other loan types? It has some benefits not found in other loans, making them attractive to a wide audience. Some benefits of FHA loans for home buyers:

• Buyers can choose exactly how much money they want to pay for their down payment so long as it’s at least 3.5%.
• It’s easier to qualify for an FHA loan because these loans were specifically made to be accessible to as many buyers as possible.
• FHA loans are versatile because buyers can choose from four different types (such as the FHA 203k loan).
• Unlike other mortgages, FHA loans do not have repayment penalties, meaning homeowners who pay off their mortgage early won’t have to pay any fees for doing so.

These benefits can be extremely helpful if getting to a 20% down payment seems like an insurmountable hurdle. While other mortgages can be inaccessible, FHA loans ultimately make it easier to become a homeowner.

Things to Consider Before Applying

While FHA loans have much to offer, they aren’t the right choice for everyone. Before a home buyer chooses to apply for an FHA loan, they need to consider the negative aspects of FHA loans. For instance, all home buyers who pay less than 20% down on a home will have to pay private mortgage insurance (PMI). PMI is an extra fee added to the monthly mortgage payment that helps protect the lender in case the buyer defaults on their loan. This can be an unpleasant surprise for buyers who aren’t expecting it as it adds to the monthly cost of being a homeowner.

FHA loans can be a great choice because they help make homeownership more accessible to more people. With this information as an introduction, home buyers can decide if an FHA loan is the right choice for their home purchase needs.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Updated December 2023