Is an FHA mortgage right for you?

You may be able to buy a home without a large down payment or a perfect credit score. An FHA mortgage loan offers more flexible qualification requirements than a conventional home loan.

Buying a home is a big deal, but it is also a realistic goal. Even if you have limited funds for a down payment or your credit score is lower than you’d like, there are
still a number of ways to become a homeowner.

An FHA (Federal Housing Administration) loan is an alternative to a conventional home loan, and it might be the right choice for you. These loans are partially guaranteed by the federal government, which reduces the risk to lenders and makes them a good choice for some home buyers. Here’s a quick summary on FHA loans:

You can qualify with a lower credit score

Your credit score, often called your FICO score, is a snapshot of your payment history that helps lenders determine how likely you are to make your mortgage payments on time. Typically, you can qualify for an FHA loan with a lower credit score than what’s required for conventional home loans.

Because the qualification requirements for FHA loans are more relaxed, there are some trade offs you should be aware of. FHA loans require both an Upfront Mortgage Insurance Premium (UFMIP) and a monthly Mortgage Insurance Premium (MIP). This means in the long-term, you’ll pay more for an FHA loan than a conventional loan, but this cost is usually outweighed by other financial benefits of owning your own home.

Your down payment can generally be smaller

To qualify for a conventional home loan, you usually need a down payment that’s 20% of the purchase price, and there are restrictions on where the down payment funds can come from. These requirements can be challenging, especially if you’re a first-time homebuyer or you don’t have a large savings account.

FHA loans generally require a much smaller down payment. Depending on your credit history and FICO score, your down payment on an FHA home loan can be as low as 3.5% of the purchase price. In general, a higher credit score means your down payment will be smaller.

You have more options on the source of your down payment funds

In addition to requiring a smaller down payment, FHA loans have the added benefit of allowing others to help you accumulate those funds. While conventional loans usually require your down payment to come primarily from money you have saved yourself or other investments, family members or friends can give you down payment funds for an FHA loan.

Your credit union mortgage loan officer can help you with the rules for down payment funds.

Other differences

FHA loans are different from conventional loans in other important ways:

• Loan size:  Both loan types have a limit on the amount of money that can be borrowed. FHA loans are determined by the typical cost of homes in a particular county or region; you can generally borrow more money for an FHA loan in places with higher home values. Conventional loans also have a cap, which is the same for most of the country, though the limits are higher in areas with more expensive homes.
• Property inspection standards/residency requirements:  FHA loans require homes to be evaluated for safety and meet local building codes and construction standards. While these standards are part of any home appraisal, they are generally more stringent with FHA loans than conventional loans. In addition, a home purchased with an FHA loan must be your primary residence. Conventional loans can be used for primary residences as well as vacation homes and investment property

Ready to get started? Contact your mortgage loan officer to learn more about getting a mortgage.