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FHA Loans

Should You Get an FHA Loan?

One of the most common types of mortgages out there is the FHA loan. Should you get one? Here are a few things to think about as you weigh this option.

FHA Loans Have Lower Requirements than Others

The main reason why so many people choose to take out an FHA loan is the looser requirements when compared to a conventional loan.

For example, a conventional loan usually requires you have a credit score of at least 620. You can get an FHA loan with a score of 580. If you have enough money for a 10% down payment, you may even get by with a score of low 500s.

Down payment requirements are lower, too. With a conventional loan, it’s recommended you have a down payment of at least 20%. With an FHA loan, the minimum is usually just 3.5%.

Your debt-to-income ratio also doesn’t need to be as good. As long as it’s under 50%, you can probably get an FHA loan. Conventional loans require something under 43%.

As you can see, these types of requirements generally make it easier to qualify for an FHA loan. It’s easier for first-time home buyers to go this route because they don’t need as strong of a financial position to buy a home with this type of mortgage.

But there are some disadvantages to using an FHA loan. Nothing comes free.

FHA Loan Limitations and Additional Fees

As you’ve explored loan options, you’ve probably heard of private mortgage insurance (PMI.) It’s essentially a fee you need to pay if you have less than 20% equity in a home using a conventional loan.

FHA loans have something similar called FHA mortgage insurance. You end up paying this twice:

  • When you purchase the home, 1.75% of the loan amount gets tacked on
  • Annual fees cost between 0.45% – 0.85% of the mortgage

Doesn’t sound like much? These low numbers can be deceiving.

Let’s say you borrow $200,000 for a home. When you first buy it, you’ll pay $200,000 x 1.75% = $3,500. Then let’s say your rate is 0.6%, so each year you pay $200,000 x 0.6% = $1,200.

No, an extra $100 per month probably won’t break the bank. But it is something to be aware of.

The other thing to consider is you’re limited as to how big the loan can be. If you aren’t buying one of the more expensive homes in the area, this may not come into play.

FHA Loans vs. VA Loans

We’re all about VA loans here at Arcus. So how does an FHA loan stack up?

On the one hand, the requirements of an FHA loan are lower than what we usually like to see for a VA loan. But there are no formal requirements, so don’t write it off yet.

VA loans do have a funding fee due when you buy the house. This is a one-time fee that does tack on to the overall cost of the home.

But here’s the big thing: VA loans don’t require any kind of mortgage insurance payment. This means you’ll usually come out ahead financially using a VA loan instead of an FHA loan.

Conclusion

Should you get an FHA loan? The short answer is: maybe. Everyone is in a different situation. But if you’re in the military or a veteran, we generally recommend exploring a VA loan instead. For some personalized advice, send us an email at sal@arcusvamtg.com and we’d love to help walk you through the decision.

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