Federally-guaranteed mortgage programs are designed to serve those who may not have perfect credit scores or earn high salaries. The Federal Housing Administration (FHA) backs home loans that give working families and individuals an opportunity to enjoy the American dream of homeownership.
An FHA Loan reduces some of the stringent requirements of privately-secured conventional mortgages making it easier to qualify. If you want to stop spending your hard-earned money on rent, you may want to consider an FHA Loan.
What is an FHA Loan?
A mortgage insured by the FHA is typically referred to as an FHA Loan. These products usually offer lower down payments compared to many conventional loans without government backing. As a result, an FHA Loan also offers people with modest credit scores access to mortgages they might otherwise not be able to secure. The wisdom behind federally-supported home loans involves increased homeownership for low-income families and those with moderate salaries.
Congress established the FHA in 1934 when the Great Depression drove the country’s housing sector into dire straits. Foreclosure rates escalated and large corporate lenders limited loan access to primarily wealthy people who could afford a 50 percent down payment. Short repayment terms also put conventional loans of the day out of reach because the monthly payments remained too high for working class families.
The FHA effectively turned the tide and made the U.S. a country of homeowners rather than renters. In 2004, the percentage of homeowners reportedly peaked at 69.2 percent and has slipped to approximately 65 percent. The good news for potential homeowners is that FHA Loans remain an invaluable resource for those on a budget. There are several types of FHA Loans.
- FHA 203(k) Improvement Loan: This government-insured loan product accounts for the cost of repairs or renovations. Adding those costs into the mortgage allows borrowers to purchase relatively inexpensive properties that require repair. After the renovations are paid through the FHA Loan, homeowners often enjoy higher property values and prompt equity.
- FHA Energy Efficient Mortgage: Much like the FHA 203(k), this mortgage provides borrowers with the resources to make energy-efficient upgrades. The house does not necessarily need to be in disrepair to get approved for this FHA Loan. It’s designed to lower utility usage and bills.
- Home Equity Conversion Mortgage: Often referred to as a “reverse mortgage,” this FHA Loan product helps those 62 and older convert equity into usable cash. They maintain the title to their home while accessing the converted equity. Withdrawal strategies may involve fixed monthly allotments or a flexible line of credit. In some cases, people employ a hybrid strategy.
- Section 245(a) Loan: Savvy financial planners who anticipate their incomes will increase in the coming years sometimes use this program. Also known as a Graduated Payment Mortgage, monthly payments start relatively low and increase in conjunction with expected salary changes.
First time home buyers usually gravitate toward an FHA Loan or a specific First Time Home Buyer program to finance their primary residence. FHA Loan Requirements are fairly straightforward and lending specialists are able to help first time home buyers find the right mortgage option for their needs.
What are FHA Loan Pros?
FHA Loan programs remain a popular pathway to homeownership because there are several options to choose from. Before deciding to go the FHA Loan route, consider whether the pros and cons mesh with your financial situation. These rank among the primary benefits an FHA Loan can provide.
- Credit Flexibility: Qualifying for some low-interest conventional mortgages may require a FICO score of 760 or higher. And the magic number for common conventional loans hovers around 620, coupled with a steady repayment history. By contrast, people with a 580 and a good repayment history can qualify for a select FHA Loan. Those with lower scores may also gain approval.
- Reduced Down Payment: An FHA-backed mortgage provides down payment flexibility in many cases. With a credit score of 580 and other strengths, homebuyers may only need to put down 3.5 percent of the home’s value. If your score runs 500-579, the down payment could still be as low as 10 percent.
Perhaps Congress’ original goal of making the U.S. a nation of homeowners instead of renters remains the top FHA Loan benefit. The mortgages offer so much flexibility for people of all tax brackets that they can quit renting and start owning sooner.
What are FHA Loan Cons?
It’s important to understand that an FHA Loan, like other options, offers a variety of terms. Even government-insured loans may put certain safeguards in place to ensure on-time repayment. Given the program opens tremendous borrowing opportunities, the so-called “cons” are not necessarily unreasonable.
- Mortgage Insurance: When homebuyers decide to put less than a 20 percent down payment, mortgage insurance may be required. Low down payments allow people to buy sooner in many cases, which prevents squandering money on rent. One strategy to eliminate the cost of mortgage insurance is to take the time to save the 20 percent down payment and refinance later.
- Property Requirements: The FHA establishes minimum property thresholds for safety, structural integrity, and security. A home must meet these standards for a mortgage to gain approval. This issue can be remedied by applying for an FHA 203(k) improvement loan.
Middle and low-income borrowers typically find value when using the FHA mortgage program. Added insurance expenses may cause the monthly expenditures to tick up higher than some conventional products. However, many conventional loan opportunities will not consider a down payment of less than 20 percent.
Alternatives to FHA Loans
Not everyone is best served by utilizing an FHA Loan. Those who have the cash on hand to put down 20 percent or more may get approved for conventional loans with even lower interest rates and flexible terms. The same holds true of people with near-perfect credit scores and above-average debt-to-income ratios. These are non-FHA mortgage options worth considering as well.
- Conventional Loans: This catch-all term refers to wide-reaching loan products not backed by the federal government. These loan products are available from lenders like credit unions. Often guaranteed by a private resource or government-sponsored Fannie Mae or Freddie Mac, people with robust credit scores, debt-to-income ratios, and 20 percent down payments may find them favorable. These loans are typically offered as a fixed or adjustable-rate mortgage (ARM) format.
- Construction Loans: Qualified borrowers can access Construction Loans offering access to money to purchase land and hire a contractor to build their dream home.
- U.S. Department of Agriculture (USDA) Mortgage: This government-backed loan program focuses on buyers in primarily rural areas. It provides flexibility similar to FHA Loans in terms of lower down payments and money for renovations. Unlike other mortgages, USDA Loans are primarily for low-income community members.
- VA Loans: Open to members of the military, veterans, and surviving spouses, VA Loans offer competitive interest rates and make homeownership easier for those who have served our country. Qualified borrowers can anticipate securing a mortgage without needing a down payment.
- First Time Home Buyer Programs: First Time Home Buyer Programs help new home buyers by offering more flexible requirements to qualify and lower down payment obligations.
Choosing the Best Mortgage for You and Your Partner
FHA Loans remain a popular mortgage opportunity for home buyers from every walk of life. Flexible options and specialized FHA Loan products fulfill the needs of most residents. But it’s important to meet with a loan professional before making a final decision on which mortgage is right for your unique needs and budget.
If you’re considering buying a home or getting pre-approved for a mortgage, consult with a Peach State Mortgage Specialist today. We’re happy to help you find the perfect mortgage for the home of your dreams.
For more tips on how an FHA Loan can help you get the home of your dreams, download our "How Much House Can I Afford in Georgia or South Carolina?" guide.