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Conventional mortgages often require hefty down payments and closing costs, and not everyone has the cash reserves to cover these expenses upfront. FHA loans provide a potential solution for homebuyers without much savings set aside, especially first-time homebuyers who don't have equity from a previous home sale. These mortgages are obtained through approved lenders, such as banks, but they are backed by the Federal Housing Administration. This government backing reduces risk to the lender, which allows FHA loans to have more lenient borrowing criteria, plus lower down payments and closing costs than conventional loans. The downside is they typically require a mortgage insurance premium to be paid, possibly for the life of the loan. Additionally, to qualify for an FHA loan, you'll need verifiable income and a minimum 500 FICO score, and the type and cost of property—and the intended use of the property—must meet certain guidelines. What Are the Requirements for an FHA Loan?Government backing and mortgage insurance mean FHA loans can have more relaxed borrowing criteria than conventional loans. Here are some of the requirements to keep in mind when preparing to apply for an FHA loan:
If you need assistance determining your eligibility for an FHA loan, find a HUD-approved housing counseling agency in your area. Their counselors can also help you navigate the application process. Can You Apply for an FHA Loan More Than Once?There's good news and there's bad news here: FHA loans aren't limited to first-time home buyers, and there's no restriction on how many times you can take out an FHA loan in your lifetime. However, because these loans are for primary residences only, you generally can't have more than one at a time. There are some exceptions, however, such as if you're relocating for an employment-related reason or if you're permanently vacating a jointly owned property (such as in a divorce, where the co-borrower will remain there). How to Decide if an FHA Loan Is the Right ChoiceAn FHA loan does offer significant benefits, but it's not the right choice for every would-be homebuyer. An FHA loan could make sense for you if:
FHA loans have their advantages, but there's a trade-off in the form of the mortgage insurance. Homebuyers who take out an FHA loan must pay an upfront premium that's usually 1.75% of the base loan amount. There's also an ongoing annual mortgage insurance premium that usually costs 0.45% to 1.05% of the loan amount. This annual premium (paid in monthly installments) lasts for the life of the loan unless you refinance later on or put down 10% or more, in which case it falls off after 11 years. Conventional loans also require mortgage insurance if your down payment is less than 20%, but the policy can be canceled once you reach 20% equity in your home. If a conventional loan is within your reach, it's worth comparing both the short-term and long-term costs since FHA mortgage insurance premiums can add up. Where to Get an FHA LoanFHA loans are backed by the government, but you apply and obtain them through FHA-approved lenders. You can find a list of approved lenders on the Housing and Urban Development (HUD) website. Keep in mind that because the government doesn't directly finance these loans, it doesn't set the interest rates or terms—the lenders do. That means the costs of FHA loans can vary, so it could be worth shopping around to find the best deal. Additionally, while FHA loans tend to have competitive interest rates, HUD recommends homebuyers still compare FHA loans with other types of mortgages in case an FHA loan isn't the most affordable option. While FHA loan interest rates may be the lowest option for those with credit issues, a conventional loan may have better rates for those with stronger credit. Make sure to also familiarize yourself with other loans and grant programs for first-time homebuyers that can offer assistance. Get Your Credit Ready Before You ApplyThe stronger your credit score, the better chance you have of getting approved for a mortgage and nabbing a lower interest rate. Before you apply for any loan, make sure you go over your credit report to understand where your credit stands and to address any potential issues you see. If possible, start reviewing your credit three to six months before you think you'll apply for a mortgage loan. This will give you some time to improve your creditworthiness by doing things like reducing credit card balances, paying off debts and taking care of any inaccuracies that might need disputing on your credit report. |