If you need to take out a loan, you might be overwhelmed by the many types available. One, in particular, is the Federal Housing Administration loan, issued by the government and built for low-to-medium income borrowers; this makes it popular among people looking for their first house. However, this alone is not perfect proof that an FHA loan is “better” than a conventional loan – there are many factors that go into a decision such as this.
As with any loan, your credit score is a big determiner in the lending process. Private or federal, any lender will look at your score and use it to calculate the risk you bring to the table. For a conventional loan, you’re likely to require a score of over 620 to be eligible, as a private lender is not backed by the government if something goes awry.
FHA loans are better in terms of your credit, in part because it was made for people who may not have the best financial situation. You can be eligible with a score of 500, which is already a big difference, but a higher score will be a help. The higher it is, the less of a down payment you have to provide.
If you don’t already know or just need reminding, a down payment is a sum needed up-front to prove you can pay it back. The minimum for this varies, with conventional loans requiring a 3% down payment if your credit is good enough. However, you might have to purchase private mortgage insurance instead of a higher down payment fee.
The minimum down payment for an FHA loan will still be 3.5% even if your credit is sparkling. You will require a score of 580 for this, but this means you can still get a decent loan even if you’re below 620. However, the payment can rise to 10% if your score dips even to 579 – one number could mean the difference between your ability to pay it back or not.
Federal Housing Administration loans currently have a lower limit in some circumstances; in low-cost regions like our local Homewood, the most you can borrow is around $356,300 compared to a traditional loan, where you can borrow up to $548,250 in the same location. It may be that you don’t intend to borrow anywhere near that amount, but it is worth keeping in mind – private lenders can push the boundary slightly, and this could be a life-saver.
There are different circumstances in which conventional and FHA loans make sense – but the attractiveness of the latter is difficult to ignore. The particulars may vary depending on your unique situation, but if you have a lower credit score and need a lower down payment, the FHA loan seems to do exactly what it was designed to help with. If you do have a high credit score, then a normal loan might be a better investment while also being somewhat more flexible.