Is an FHA loan right for you?

hand holding a toy house for sale

If you have too much debt to qualify for a conventional mortgage, less than stellar credit scores or not much cash for a down payment, consider buying a home with an FHA loan.

The Federal Housing Administration, a division of the Department of Housing and Urban Development, was created 80 years ago to help low- and moderate-income families borrow the money they need to buy a home.

The FHA doesn't actually make home loans. It guarantees that lenders will be repaid if you default on the loan.

That guarantee allows banks and mortgage companies to work with borrowers who might not be able to qualify for conventional home loans and at surprisingly competitive interest rates.

The majority of lenders make these mortgages, and about 1 in 6 new home loans is backed by the FHA, according to Ellie Mae, a California-based mortgage technology firm.

There are serious limits on how much you can borrow with an FHA loan for a single-family home, and the FHA raised them for 2017 — up to $275,665 for single-family homes in most parts of the country or as much as $636,150 in high-cost cities such as New York and San Francisco.

(Here's where to find the FHA loan limits in your area.)

But if the amount you need falls within those guidelines, here are the advantages to getting an FHA loan.


Advantage 1. You'll need a smaller down payment.

Most FHA mortgages require a 3.5% down payment — that's $3,500 for every $100,000 you borrow — and the average down payment on an FHA home loan is about 4%, according to Ellie Mae.

That's far less than the 20% average for conventional home loans.

Your down payment can be a gift from a relative, a friend or an organization that provides financial assistance.

Many conventional mortgages require the down payment to come from a borrower's savings or other assets, such as proceeds from the sale of another home.


Advantage 2. You can qualify with below-average credit.

The average FICO score for buyers who finance FHA loans is 686, according to Ellie Mae.

That's considerably lower than the average score of 753 for conventional, non-FHA financing.

So what's the secret to qualifying if you have a credit score in the low 700s or high 600s?

Successful applicants usually have a two-year history of steady employment and paying their bills on time.

You can get an FHA loan if you're self-employed. Just be ready to document your income with tax returns and financial statements from your business.

The same big financial problems that derailed FHA applications in the past continue to do so. If you:


Advantage 3. You're allowed to carry more debt.

According to Ellie Mae, the average borrower with a new FHA loan spends 28% of their gross, pretax income on housing costs — everything from mortgage payments and taxes to insurance and homeowner association fees.

That homeowner also spends 42% of their income on all debt payments, which would be their housing costs plus car loans, student loans and credit card bills.

The average buyer who finances with a conventional loan only spends 23% of their income on housing costs and 34% of their income on all recurring debt payments.


Advantage 4. The interest rate could be lower.

With the government standing behind your debt, lenders charge a much lower interest rate than your credit scores and debt might warrant.

Ellie Mae says the average cost of a 30-year fixed-rate FHA loan, including both purchases and refinancings, is around 3.74%.

That's actually less than the average cost of a conventional loan, which is around 4.30%.

So what's the big disadvantage to FHA financing?

It's the mortgage insurance you must buy to offset the cost of that government guarantee.

All borrowers, regardless of loan term or down payment, must pay the 1.75% up-front mortgage insurance premium at closing.

That means you pay a $1,750 insurance premium on every $100,000 borrowed.

While that sum can be added to your loan amount so you don't have to bring more cash to the table, it's still an extra charge. And if you finance it, you'll pay interest on it, too.

Most borrowers will also have to pay monthly insurance premiums, which were actually reduced in January 2015 for 30-year fixed-rate mortgages.

For a 30-year loan with a down payment of less than 5%, your premiums will be 0.85% (down from 1.35%) of the outstanding balance each year.

That cost is typically divided into 12 monthly payments and added to your mortgage payment. That's $850 per year, or about $70 per month, per $100,000 of loan balance.

If you put more than 5% down on a 30-year loan, your annual premiums will be 0.80% (down from 1.30%).

It used to be that you only had to carry this insurance for at least five years on all loans longer than 15 years, or until the balance on your mortgage was down to 78% of the original purchase price, whichever took longer.

Since mid-2013, new FHA borrowers who put down less than 10% have been required to pay these premiums for the life of the loan. This rule isn't changing.

If you keep your FHA financing for 30 years, you'll pay significantly more in mortgage insurance premiums than you would with a conventional loan and private mortgage insurance.

That's because on non-FHA loans, borrowers can usually drop private mortgage insurance once the loan balance is down to 80% of the purchase price and after as little as one year.

Conventional loans also allow you to count home price appreciation toward obtaining the needed equity. FHA mortgages do not.



RATE SEARCH: Shop the best mortgage rates.

  • Layla Jones

    Find top lender offering best deals on FHA loans, Lowest Interest Rates and Easy Online Approval. Visit now: FHALOANSUSA(dot)com (Just replace the (dot) with the actual .)

  • Sarah

    So me and my husband are trying to get a home loan. Our credit scores are slightly above 580 but will the fact that we both haven't worked at our jobs for a year yet and my husband was working temp jobs for awhile effect us? And we also have a few things in collections we've been working on getting cleared up right now it's about $5k and we also have student loans. I'm just curious whether or not we will even qualify for an fha loan or not.

  • Isaiah Young

    Mortgage is constantly changing. If you're looking for an FHA loan, try Home Loans For All. We refer most of our clients to them. They've been a lifesaver for our firm.

  • Yanni Mack

    Im trying to find out the same thing.. I was told by a lender yes they must add 2% for what ever your student loans equal, but i cant understand why they would include a loan you dont have an obligation to pay at the time..Have you received more information on this question?

    • Ashley

      Deferred student loans just got our once-preapproved loan denied

  • Samantha

    My credit score is below 550 anyone have any suggestions

  • rose

    who did you you use Billy?

  • Beth Wright

    If you need an urgent loan from a trusted firm, with good working conditions and relationship, then you are to contact us for we offer loans at affordable rate of 2% and working with is convenient. if interested, contact us through email: (jonfunding@gmail.com)

  • Ashley

    My credit score is 660 and we were pre-approved but were now being told that its not high enough and that our current student loans ( one being paid well over the minimum and one on defferment) will put our debt ratio too high. Can we go through a diff bank with a different loan approval process?

  • favour

    I am williams abby currently living in New jersey city, USA. I am a widow at the moment with three kids and i was stuck in a financial situation in April 2015 and i needed to refinance and pay my bills. I tried seeking loans from various loan firms both private and corporate but never with success, and most banks declined my credit ,do not full prey to those hoodlums at there that call them self money lender they are all scam , all they want is your money and you we not hear from them again they have done it to me twice before I met Mrs. favour the most interesting part of it is that my loan was transfer to me within 74hours so I will advice you to contact Mrs. favour if you are interested in getting loan and you are sure you can pay him back on time you can contact him via email……… (favourloans54@gmail.com) No credit check, no co signer with just 3% interest rate and better repayment plans and schedule if you must contact any firm with reference to securing a loan without collateral then contact Mrs.favour today for your loan

    Email……….(favourloans54@gmail.com)

  • Mr Donald Robert

    Hello Sir / Madam, NEW YEAR LOAN OFFER

    You needed money lending between individuals to cope with financial
    difficulties to finally break the deadlock provoked by banks, by the
    rejection of their files to apply? I am a financial experts able to
    make a loan in the amount you need and with conditions that make life
    easier. Here are the areas where i can help:
    * Financial
    * Lend Lease
    * Investment loan
    * Auto loan
    * Debt Consolidation
    * Credit line
    * Second mortgage
    * Credit Redemption
    * Personal loan

    so if you are interested in getting a genuine loan simply Email:
    guaranteloanfinancescompany@gmail.com

    Thank you

  • Wallace Dickson

    To Whom it may concern!!!

    Are you a businessman / woman? Are you in any financial mess or you need
    funds to start your own business? or to pay off your bills or start a good
    business? Contact us on loaninvestment01@outlook.com. You can also Text or Call
    Our Head Office In United state of America on +19513571932.
    required to fill the info :
    Name—-
    Amunt—-
    Duration—-
    Phone number—
    Country—
    Regards,
    FROM: Wallace Dickson Loan Company
    +19513571932.
    loaninvestment01@outlook.com

  • Jerry Willfred

    Good Day Every One.

    I am Tyrone by Name, a well know good investor, i will grant you all kinds of loans you need because our services are reliable.

    I give out loans at 3% interest rate and from a duration of 6 months to 25 years.

    My work is trusted and guarantee, reliable and quick, fast and understanding. So i urge you now to apply because application is open to those above 18+.
    Contact us through our email today at tyrone.singh23@yahoo.com or tyronesingh89@gmail.com you can as well call us on +1 205_409_0926

    Thank You,I await your swift application so that we can help you out with what you want.

    tyrone.

  • Jerry Willfred

    Good Day Every One.

    I am Tyrone by Name, a well know good investor, i will grant you all kinds of loans you need because our services are reliable.

    I give out loans at 3% interest rate and from a duration of 6 months to 25 years.

    *My work is trusted and guarantee, reliable and quick, fast and understanding. So i urge you now to apply because application is open to those above 18+.
    Contact us through our email today at tyrone.singh23@yahoo.com or tyronesingh89@gmail.com you can as well call us on +1 205_409_0926

    Thank You,I await your swift application so that we can help you out with what you want.

    tyrone.

  • Jackson Candy Marquez Michelle

    TESTIMONY ON HOW I GOT A LOAN TO CHANGE THE BROKE LIFE OF MY FAMILY

    My name is Marquez Michelle. I live in maryland US. i am happy woman today? I told my self that any Loan lender that could change my Broke Life and that of my family, i will refer any person that is looking for loan to Them. They gave happiness to me and my family, i was in need of a loan of $89,250.00 to start my life all over as a widow with 3 kids I meant this honest and God fearing loan lending company online that helped me with a loan of $89,250.00 U.S. Dollar, They are indeed God fearing People, working with a reputable loan company. If you are in need of loan and you are 100% sure to pay back the loan contact them via email: mckinleyharris96@yahoo.com and please tell them that Mrs, Marquez Michelle referred you to them.

  • Hamid Faruk

    Have you been asking for financial help from private firms? Do you need loan to start or expand a business? Do you need the counsel a private lender? This is a private company that offers loan at 2% affordable for everyone. Contact us for your loan today at email: farukfinancial@gmail.com for more information

  • percival hess

    Hello everyone
    am Mr percival hess, a private loan lender

    do you need a mortgage loan to buy a house, land, car, or are you financially down?
    we give out loan at 3% interest rate.
    do you need a loan to start up a business?
    email us today at
    percivalhessfinance@yahoo.com or
    percivalhessloanfinance@gmail.com

    Note: only serious people can get this loan from us

    we await your response soon

    thanks
    Percival Hess