Key insights:
- Having a hard time saving for your down payment? Not sure if you have the credit you’ll need to get a mortgage? An FHA loan could be the right fit.
- FHA loans are great for first-time borrowers or other home buyers who can pay a mortgage, but who are having a hard time saving upfront.
- Because FHA loans are a bit riskier, borrowers will have to pay some additional fees — in the form of mortgage insurance — in connection with the loan.
If you, like many first-time homebuyers, are having a hard time saving for a down payment, it may be time to consider an FHA loan. FHA loans are backed by the Federal Housing Administration and they act as “helper” loans for buyers who can afford a monthly mortgage payment but may struggle with other aspects of getting approved for a loan.
Here are insights you can use to help determine if an FHA loan is right for you.
Remember, every buyer is different, so it’s important that you work with a professional who understands your background. Your REALTOR® can recommend a mortgage loan officer or financial advisor who can provide a personalized, professional assessment of your finances.
Why FHA loans are great for first-time buyers
The FHA is a U.S. government agency that backs lenders, and the FHA is more likely than private lenders to provide home mortgage loans to individuals with low savings or less-than-perfect credit.
While you may have heard that you’ll need 20 percent down in order to qualify for a mortgage, FHA loans allow borrowers to pay as little as 3.5 percent at closing. (Note: To minimize the amount you pay over time, it is advised that you save as much as possible for your down payment.)
In addition to the lower down payment requirement, FHA loans can also be approved for buyers with a credit score of 580 or higher. If you are near that score, you may want to talk with a financial advisor about how you can continue to improve your credit.
What are the disadvantages of an FHA loan?
As mentioned earlier, FHA loans are “helper loans,” and they are meant for homebuyers who need a small boost. Each county in the United States has an FHA loan limit that is based on the cost of living in that area. For that reason, a buyer purchasing a luxury home should not seek out an FHA loan, but a buyer seeking a starter or modest home will find plenty of properties that fit the FHA loan amount standards.
Here are the FHA loan limits by county for Minnesota and Wisconsin.
The second disadvantage of an FHA loan is related to mortgage insurance. Because FHA borrowers are considered riskier, the Federal Housing Administration minimizes their risk by charging mortgage insurance at the closing table and over the life of the loan. Homebuyers can work with their lender in advance to determine the exact monthly cost of their mortgage insurance.
Thinking of buying your first home?
FHA loans are a great option for responsible buyers who need just a little help. FHA loans are available for single-family homes, new home constructions, condominiums and one- to four-family homes.
If you're looking for more information regarding FHA loans or you have additional home mortgage questions, please contact our customer care team.
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