There are plenty of financial considerations when applying for a home loan. Not only do you have to meet the qualification requirements of the lenders, but most importantly, you have to assess your long-term capacity to pay for your mortgage. Thankfully, more accessible mortgage options were created, making it easier for the working classes to own a home.
The FHA loan is one of the most popular and easy-to-qualify mortgages in existence. To set things straight, they are called FHA loans because they are insured by the Federal Housing Administration or FHA. The government does offer these loans; it merely guarantees them to lessen the risk for lenders, and at the same time encourage them to originate loans with lower qualifying standards.
FHA vs Conventional Loan: Which is Better?
Due to the popularity of FHA loans, it is always pitted against another well-known mortgage option – conventional loans. The thing is, both mortgages have their fair share of upsides and downsides.
In the FHA vs Conventional debate, the FHA loan will always be the better option for those who find the 20% down payment and stringent credit qualifications of conventional loans way too difficult to achieve. On the other hand, patrons of conventional loans think that FHA loans have plenty of unnecessary fees and charges, making it impractical in the long term.
The biggest drawback to FHA loans is its MIP or mortgage insurance premium. Unlike conventional loans that don’t require any insurance if you put 20% down payment, FHA loans come with a MIP that you have to pay for the entire term of your loan.
Benefits and Advantages of The FHA Loan
Despite the substantial insurance, the FHA loan offers plenty of great benefits to qualified borrowers. Below are four of its most notable advantages.
Easy-to-qualify FICO score requirement
Good credit standing is a pre-requisite to any type of loan. However, some people find it impossible to raise their credit score to 620 or 640 – the standard for conventional loans, due to past and current circumstances.
For FHA lenders, however, a 580 FICO score is good enough. Even those with credit ratings as low as 500 can try to qualify for FHA loan, as long as they agree to pay more upfront.
Lower down payment
Most conventional mortgages require borrowers to put anywhere between 10% to 20% down payment, which could be too much for a middle-class family with kids. The FHA loan offers a 3.5% down payment rate to an applicant with a FICO score of 580 or higher.
Even better is the fact that the down payment and closing costs don’t have to be entirely from your own pocket. FHA lenders allow down payment gifts. The seller can also take care of the closing costs.
Allows non-occupying co-borrowers
Another helpful feature of the FHA loan is its non-occupying borrower amendment. This allows the primary borrower to enlist a co-borrower and raise their creditworthiness – in case their salary or DTI ratio is lower than desired.
The co-borrower need not stay in the property, which means any family member who is willing to help can do so.
Easy to Assume or Refinance
The FHA loan is eligible for “streamline refinances” — a cheaper and faster way to refinance mortgages, and with lower interest rates. FHA mortgages are also assumable, making them easier to sell in the future.
The Bottom Line
The FHA loan may seem very impractical when you single out the insurance costs, but it has helped hundreds of thousands of families afford a home. Clearly, this is a case to case basis and people should refrain from comparing the two.