3 Reasons an FHA Loan May Be Right for You

Here's why an FHA loan could be a great fit.

If you're looking to buy a home, you'll probably need a mortgage to finance it. You could apply for a conventional loan. But another option is to apply for an FHA loan -- a mortgage that's backed by the Federal Housing Administration. Here's why an FHA loan may be a good solution for you.

1. You don't have a lot of money for a down payment

Some conventional mortgage lenders will allow you to buy a home with as little as 5% down at closing. But often, you'll have to make at least a 10% down payment, and many lenders require as much as a 20% down payment. If you don't have a lot of funds available to put toward a home purchase, an FHA loan could be a better choice. With an FHA loan, you can buy a home with as little as 3.5% down.

And if you need more help, our guide on how to buy a house with zero down payment can help.

2. Your credit score isn't great

The minimum credit score needed to qualify for a conventional mortgage is 620, but it's not uncommon for individual lenders to impose even higher standards. In fact, during periods of economic uncertainty, lenders will frequently tighten their requirements and impose higher credit score thresholds to protect themselves. The great thing about FHA loans is that they have much lower credit score requirements. You can generally qualify with a score as low as a 580.

For more information, check out our guide to learn how to get a mortgage with bad credit.

3. You recently filed for bankruptcy

A Chapter 7 bankruptcy, which is a personal liquidation, can have a negative impact on your credit for many years. In fact, you'll generally need to wait at least four years following a Chapter 7 filing to qualify for a conventional mortgage. On the other hand, you may be eligible for an FHA loan just two years after a Chapter 7 bankruptcy. Now, there are some caveats here. To get a mortgage that soon after a Chapter 7, you must build up a decent credit score and avoid taking on too much additional debt. But you'll generally get more leeway with an FHA loan post-bankruptcy than with a conventional mortgage.

Should you get an FHA loan?

FHA loans aren't perfect. The one major drawback associated with an FHA loan is that you'll be charged an up-front mortgage insurance premium. This is to protect your lender in case you don't manage to keep up with your mortgage payments. In addition, you'll need to pay ongoing monthly mortgage insurance premiums that will make your home more expensive.

However, if you don't have a lot of money available for a down payment, your credit score isn't great, or you want to buy a home shortly after a bankruptcy filing, then an FHA loan could be a good solution for you. And as is the case with any mortgage you get, it pays to shop around with different FHA lenders. That way, you can compare the offers you receive and see which one results in the maximum amount of savings for you.

To learn about even more loan options, look into our beginner's guide to home loans.