The strict requirements that often come with conventional mortgages make borrowers want to consider FHA loans. These mortgages have relaxed restrictions, which is a great choice for many first-time buyers or those who can’t afford a 20% down payment. The minimum down payment such loans is 3.5% and you may even be approved with a less-than-perfect credit score.
Conventional mortgages, on the other hand, require a higher credit score, especially if you want to get good rates. They also demand a larger down payment and a lower debt-to-income (DTI) ratio. You may be able to qualify for a conventional loan with a poor credit score, but the rates are likely to be higher because of the additional risk of your credit rating.
What’s the Catch?
With such relaxed requirements, you may wonder what the catch is with FHA loan. The Federal Housing Administration (FHA) insures the mortgage, which means that they will pay back the lender or the bank in case you default. There is no substantial risk for the lenders. But just like any other insurance, you will need to pay insurance premiums.
Considering the Advantages
While there are downsides to FHA loans, many borrowers focus on its advantages. Apart from requiring low down payment, these also allow lower credit score and have shorter waiting periods for major credit issues like foreclosure and bankruptcies. Primary Residential Mortgage, Inc. and other FHA loan companies note that it’s also easier to use the money given to you as a gift for making a down payment.
Here are the other advantages of an FHA loans:
- Usually have lower base interest rates
- Allow approval for those with high DTI ratios
- May cover closing costs
- Some FHA loans are assumable loans, allowing you take over the seller’s mortgage
When deciding whether this loan is right for you, you need to weigh the pros and cons. If you can’t qualify for a conventional loan, you may try to save more or choose an FHA loan. If you chose the latter, it is best to work FHA loan company to learn more about this type of mortgage.