15 Things You Need to Know Before Getting an FHA Loan

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15 Things You Need to Know Before Getting an FHA Loan

Is an FHA loan your best borrowing option?

When it comes to buying a home, you have different financing options you can look at. You could take out a conventional mortgage, or you could opt for an FHA loan. Here's what you need to know if you're contemplating the latter route.

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1. It can be easier to qualify for an FHA loan than a conventional loan

Conventional mortgage lenders have certain requirements for credit scores and down payments, making it difficult for some buyers to secure financing for a home. FHA loans impose looser requirements in both regards, thereby making homeownership possible for more buyers.

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2. You can buy a home with as little as 3.5% down

With a conventional loan, you'll commonly need to make a 10% down payment. With an FHA loan, you can purchase a home with a down payment as low as 3.5%.

ALSO READ: How to Save for a Home Down Payment in 2022

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3. But you can put more money down if you want

While it's possible to get an FHA loan with only 3.5% down, you have the option to make a larger down payment if you're able to do so. That could, in turn, help you build equity in your home sooner.

4. There are several types of FHA loans

There are different types of FHA loans, but the two most common are FHA 203(b) and 203(k) loans. The 203(b) loan is the traditional FHA loan that's used to purchase a home. FHA 203(k) loans are rehabilitation loans that allow buyers to purchase a home and finance repairs.

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5. You need a credit score of 580 if you're making a 3.5% down payment

If you're putting less than 10% down on your home, you'll need a credit score of 580 or higher to take out an FHA loan. But that's considerably lower than the 620 score needed for a conventional loan.

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6. You can qualify with a credit score as low as 500

If you can put 10% down on your home purchase, you can sign an FHA loan with a credit score as low as 500. That said, if your credit score is a 500, you may want to work on catching up on bills or paying off existing debt before taking on a mortgage payment.

ALSO READ: 5 Ways to Boost Your Credit Score in 2022

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7. You'll need a steady job to qualify

FHA lenders will look into your recent employment history to see whether you qualify to borrow money for a home. If you have gaps in your recent work history, you'll need to prepare to explain them.

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8. You'll need a reasonable debt-to-income ratio

Your debt-to-income ratio measures how much debt you already have relative to what you earn, and the lower it is, the more attractive a loan candidate you'll be. Most FHA lenders will want to see a debt-to-income ratio of 43% or less.

ALSO READ: 5 Tips to Lower Your Debt-to-Income Ratio

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9. You can take out an FHA loan to buy a multi-unit property

With an FHA loan, you're not limited to a single-family home. You can use an FHA loan to buy a home with up to four units -- and with the same 3.5% down payment requirement.

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10. You'll pay an upfront mortgage insurance premium

When you take out a conventional mortgage, you get charged private mortgage insurance if you don't make a 20% down payment on your home. With an FHA loan, you get charged an upfront mortgage insurance premium that equals 1.75% of the amount you're borrowing.

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11. You'll also pay ongoing mortgage insurance premiums

It's not just an upfront mortgage insurance premium you'll pay with an FHA loan. You'll also be on the hook for ongoing premiums that make your loan more expensive. That's one major drawback of taking out an FHA loan.

ALSO READ: FHA Loan Limits: How Much Can You Borrow?

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12. FHA loans have limits

Just as there are borrowing limits for conforming mortgages, so too are there limits on what you can borrow with an FHA loan. For a one-unit home in most of the country, the limit is $420,680. There are higher limits for high-cost areas and homes with a larger number of units.

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13. You'll need to budget for closing costs

Closing costs are an expense borrowers bear when getting a mortgage, and they apply in the world of FHA loans, too. Those costs are meant to cover expenses like title insurance, loan origination fees, and home appraisal fees.

ALSO READ: What Are FHA Loan Closing Costs?

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14. FHA loans can be more competitive rate-wise than conventional loans

Even though FHA loans tend to have more lenient borrowing requirements than conventional loans, they're still known to offer attractive interest rates. In fact, you may find that you end up paying less interest with an FHA loan than with a conventional loan.

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15. It's important to shop around for a lender

There's no such thing as a universal mortgage rate for FHA loans. Rather, each FHA lender sets its own rate. That's why it's important to reach out to different lenders and compare offers before signing an FHA loan.

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Is an FHA loan right for you?

If you have a lower credit score and limited funds for a down payment on a home, an FHA loan is a borrowing option worth exploring. It pays to read up on these loans to see whether an FHA mortgage is the ideal choice for you.

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15 Things You Need to Know Before Getting an FHA Loan