September 30, 2022
You may have heard that the FHA loan program features a low minimum down payment, lower credit requirements, plus the ability to apply for extra loan funds to add energy-saving improvements to the home you are buying with an FHA loan. This is accomplished using a program called the FHA Energy Efficient Mortgage.
FHA home loans, which are NOT for first-time home buyers only, are offered to all financially qualified applicants. These home loans, unlike some of their USDA counterparts, are not need-based and do not feature income restrictions.
FHA mortgages are government-backed loans, which means there is an arrangement between the lender and the federal government that reduces the risk to the lender. This is why FHA lenders can offer you lower down payments and more competitive interest rates if you financially qualify for the loan.
The benefits of having a government-backed mortgage include help if you get into trouble with the loan. For example, if there is a natural disaster in your area or you have financial difficulty and need to make temporary arrangements with your mortgage. In these cases, there are government-directed options that you may be able to use with the participation of your lender.
When it is time to apply for your mortgage, know that FHA loans have more forgiving credit score requirements. A conventional lender may require higher FICO scores; on paper, FHA loan rules let applicants with FICO scores of 580 or better to get the most affordable options.
Conventional loans may typically require FICO scores in the mid-600s for the best rates and terms. But with an FHA mortgage, you could use a down payment assistance option from a state or local agency near you to help lower your upfront costs as much as possible.
Conventional loan down payments are typically 5%, though there are certain lower down payments possible with some Fannie Mae and Freddie Mac conventional loans. Is your goal is to save more money out of pocket at the start of the loan? FHA 3.5% down payment minimums could be significantly offset by down payment assistance if you qualify for it.
FHA loans offer certain advantages you should know about. For example, borrowers can walk away from a sale if the home appraises lower than the sale price; FHA loan rules let you do so without having to forfeit your earnest money.
And what about getting a home loan you can pay off early with no financial penalty? FHA loans are specifically designed for this, by default. You will have to ask a conventional lender if the same is true for their non-government-backed loans.
What about applying for a mortgage that potentially offers a lower fixed interest rate than some conventional loans? Thanks to the backing of the government, that is possible with an FHA loan. but keep in mind that your FICO scores will also affect the lender’s choices when offering rates to you.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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