FHA Loans are quite popular due to their lower down payment requirements and easier lending criteria. IF you have ever used an FHA mortgage calculator the numbers can be quite attractive, and you may be wondering if this loan is right for you
FHA vs Conventional
The thought of a lower down payment alone is very appealing to most homebuyers, as it can be difficult to save up a 20% down payment. On a $450,000 home the conventional down payment would be approximately $90,000, which lets face it- that’s not exactly chump change that we have lying around.
It takes meticulous planning and saving to be prepared for a home purchase. It also helps to have a stable job or career, with some basic knowledge of investments and economics. However, this is all much easier said then done, unfortunately life is not always so black and white. We often find ourselves in the grey areas, wishing we were in a better spot, or needing some assistance at different times.
This is what accounts for all the different financial rates and products in the market. There is something out there for everyone.
With an FHA Loan the required down payment is only 3.5%, as opposed to the conventional 20%. Furthermore, the full down payment can be a gift from friends or family. The lower down payment requirement opens the door for many first time homebuyers, and those stuck in a cycle of renting to finally invest in their own home, instead of paying someone else’s mortgage.
The down payment is not the only thing a lender will take into account when issuing a mortgage loan. There are many other factors that need to be taken into consideration, such as the applicant’s history of fulfilling payment obligations, current debt, and types of credit- among other detailed credit questions.
The minimum FICO requirement for a conventional mortgage is 620; so basic math dictates that a large number of Americans will fall below that range. Falling below a FICO score of 620 will make it nearly impossible to obtain a conventional mortgage at any reasonable rate, without a hefty down payment. It’s likely that if you have a poor credit score you don’t have hundreds of thousands of dollars lying around for high interest rates and home down payments, it’s common sense really.
An FHA loan only requires a score of 580 to be eligible for a down payment of 3.5%, which opens the horizon for those that have had problems with their credit. For those below 580, there is the option of a 10% down payment, which is still only half the conventional requirement.
Why isn’t everyone getting an FHA Loan?
The mortgage insurance comes at a price. In exchange for the lower down payment, and credit leniency, there are additional fees. There is a one time, upfront mortgage insurance premium of 1.75% of the total loan amount. On a $450,000 home loan that is just shy of $8000. This can be added to the total loan amount, but ultimately does need to be paid at one point or another. That is required in combination with the 3.5% down payment, but does not go towards reducing your principle (the amount owed on your loan).
There is also an annual premium of 0.85% that gets added to your monthly loan repayment. For the mortgage in question that amount would be just shy of 350$ per month in additional payments, and can last the entire term of your mortgage.
So for those with good credit, and enough savings for a conventional down payment, it often does not make sense to pay additional premiums instead of putting the equity back into the home.
The FHA has more stringent guidelines on what type of properties will be financed with an FHA loan, along with a multi-step appraisal , which also differs from the conventional process. The appraisal requires certain health and safety precautions to be met, along with extensive requirements for condominium funding. The extra precautions and requirements can very easily delay the process of obtaining a mortgage and eliminate many properties from this type of financing.
The FHA also has a limit on the property value, with the maximum financing for properties being at $750,000.