Originally created to help first-time buyers get on the property ladder, FHA loans are now available to all buyers. And they’re the second most popular home loan option, just behind conventional loans. But is this the right home loan option for you?

Here’s everything you need to know about FHA loans.

What is an FHA Loan?

An FHA loan is a mortgage loan backed by the Federal Housing Administration (FHA). The FHA insures your loan, essentially guaranteeing lenders that the loan will be repaid. This means less risk for the lenders, which means lenders can be more flexible with credit score requirements and down payments.

The relaxed credit and down payment requirements make FHA loans an excellent option for first-time buyers. You might only have a down payment of 3.5%, and you might have a few negative notes on your credit report, but you can still become a homeowner!

Who is Eligible for an FHA Loan?

Each lender sets its own requirements for FHA loan eligibility (within the legal boundaries), but in general, lenders like to see the following from FHA borrowers:

Reasonable credit. Lenders want to see a score of at least 580. But you can qualify with a score as low as 500 as long as you can put 10% down.
A 3.5% down payment (or more). You need to put at least 3.5% down with an FHA loan. But if you can put 20% down, you can avoid paying the Mortgage Insurance Premium (MIP). MIP consists of a one-time upfront fee of 1.75% of your loan amount, plus an annual fee of 0.45% to 1.05% of the loan balance. These amounts are typically included in your monthly mortgage payments.
A reasonable debt-to-income ratio (DTI). Lenders typically want to see borrowers spend less than 36% of their income on debt payments (like their new mortgage plus any student loans, auto loans, etc).

In addition to meeting these requirements, your chosen property must also qualify for an FHA loan. The FHA has strict minimum property standards for safety and living conditions.

Pros and Cons of FHA Loans

FHA loan pros:

Because the borrower requirements are more flexible than conventional loans, it can be easier to qualify for an FHA loan.
You can get a loan with a low 3.5% down payment, even if you have minor credit issues.
There are no income limits. No matter how much you make, you can apply for an FHA loan.

FHA loan cons:

If you have a MIP, you can only remove this charge by refinancing.
There is no 0% down payment option with FHA loans.
You can only use an FHA loan for your primary residence. You can’t use an FHA loan for a vacation home or investment property. However, you can use an FHA loan to purchase a multi-family property with up to four units, as long as you live in one of the units.
There are strict limits on how much you can borrow with an FHA loan.

We’re Here to Help!

At Sequoia Real Estate, we want to make your home purchase experience as smooth and enjoyable as possible! We can help you get in touch with a reputable lender who can explain your loan options, and get you pre-approved for a home loan right away. This pre-approval will tell you exactly how much you can borrow so you can start your search in the right price range. And, when you find the right home, your pre-approval will assure the sellers that you’ll be able to get the financing to close the deal, making your offer more appealing.

Don’t put off your new-home dreams any longer. Contact us to start your home search today!