Buying a home when you have little money saved and a less-than-perfect credit score might seem like a dream, but it’s not. In many cases, a Federal Housing Administration loan can help.
Whether you’re a first-time or a repeat homebuyer, or you need to refinance, an FHA loan is worth exploring.
An FHA loan is a home loan the Federal Housing Administration insures. FHA loans require a smaller a down payment and lower closing costs and allow relaxed lending standards to help homeowners who don’t qualify for a conventional mortgage.
FHA loans allow a down payment of as little as 3.5% on a mortgage. This can make it possible for lower- and middle-income borrowers to buy a house when they don’t qualify for a conventional loan — which has stricter requirements, including a higher credit score and bigger downpayment.
The FHA provides mortgage insurance on loans issued by private lenders, backing them financially in case borrowers default or do not honor the terms and conditions of their mortgages. The premiums on the insurance are paid by the borrower.
FHA-insured loans come with competitive interest rates, smaller down payments and lower closing costs than conventional loans. Another FHA loan perk: A financial gift from a family member, employer or charitable organization can account for up to 100% of your down payment.
However, there’s one downside to FHA loans. Mortgage insurance on a conventional loan can be canceled after your loan is paid down to 80% or more of the appraised value of the home, but FHA mortgage insurance stays for the life of the loan.