A Low Down Payment One of the most attractive characteristics of an FHA loan is the low down payment requirement. Contrary to traditional beliefs surrounding down payment requirements, you don't typically need to make a 20% down payment to achieve homeownership.
Federal Housing Administration (FHA) loans are guaranteed by the U.S. government and designed for homeowners who may have lower-than-average credit scores and lack the funds for a big down payment. They require a lower minimum down payment and a lower credit score than many conventional loans.
Final thoughts for buyers
While FHA loans can provide increased accessibility for many homebuyers, they may not be the best fit for those looking to purchase a non-primary residence, properties that don't meet FHA inspection requirements, or homes that exceed loan limits.
Benefits of an FHA Mortgage
FHA loan benefits include low down payments, great interest rates, easier credit rules, and financing for 1-4 units. Read on to see if an FHA is for you.
Lower Down Payment
Most FHA loans allow you to put down as little as 3.5% of the purchase price. This is a huge advantage for buyers who don't have a large savings account or have limited financial resources. Other mortgage products may have down payments closer to the 20% mark.
As unjustified as it may be, some sellers may hold a negative perception of an FHA borrower because they didn't meet the bar of a conventional loan's stricter requirements. Sellers may fear the deal will fall through during underwriting when credit and income are verified and assets and credit history are reviewed.
Sellers are generally free to choose whichever offer they like best, and they don't legally have to accept or even consider any offers, FHA or otherwise.
While FHA loans make it easier to buy a home, they have several downsides that you should consider before applying for one. Borrowers who take out FHA loans will likely face higher costs upfront and with every payment, and it could signal that they aren't ready for a mortgage.
For FHA-insured loans endorsed on or after December 8, 2004, no refund is due the homeowner unless they refinanced to a new FHA-insured loan, and no refund is due these homeowners after the third year of insurance.
Whether you're interested in a listing or touring an open house, here's a list of things buyers can look for that may be considered red flags to an FHA appraiser: Missing handrails. Cracked windows. Termite damage.
FHA loans have more flexible requirements than other types of mortgages. It's possible to qualify with a credit score as low as 580 and a down payment of just 3.5%, or a score as low as 500 if you have a 10% down payment. But whether or not you'll qualify depends on your finances as a whole.
“Conventional loans have higher minimum requirements than FHA and require a larger down payment,” Yates said. “Sellers prefer a buyer with conventional financing over FHA financing because they feel the buyer is in a better financial position.”
Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn't diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.
FHA loans are best for first-time homebuyers and buyers with low credit scores due to low down payment and credit score requirements.
The overall structure of the property must be in good enough condition to keep its occupants safe. This means severe structural damage, leakage, dampness, decay or termite damage can cause the property to fail inspection. In such a case, repairs must be made in order for the FHA loan to move forward.
FHA rules allow the seller or another third party to pay up to 6% of the property sales price toward closing costs or other prepaid expenses. Consider asking for any seller assistance during the contract negotiation.
Federal Housing Administration (FHA) loans take an average of 45 days to close. For home purchases, the average is 44 days. For refinances, it's 48 days. When you apply for this type of mortgage, the underwriter will make sure that your application meets the lender's standards as well as those set forth by the FHA.
In fact, anyone who meets the eligibility requirements can apply for an FHA loan. Whether you're a first-time buyer or a seasoned homeowner, if you're looking for a loan with a low down payment and flexible credit requirements, an FHA loan could be right for you.
If you put 20% down on an FHA loan, you would pay a lower annual mortgage insurance premium. The premium requirement would also stop after 11 years. However, if you have 20% to put down and your credit score is 620 or higher, you may want to pursue a conventional loan instead.
NAHB analysis of the most recent Quarterly Sales by Price and Financing published by the U.S. Census Bureau reveals that the four-quarter moving average (MA) share of new home sales financed through FHA was 11.0% in Q2 2022–its smallest share since early 2008.
The FHA has no limit on how much above the asking price you can offer. However, your loan amount cannot exceed the appraisal of the property plus the cost of repairs.
FHA loans are assumable, which means they can be transferred to your buyer. Price sensitive buyers could really benefit from a low fixed rate loan, making your home more marketable.
Borrowers pay an average of $7,402 in closing costs when taking out FHA loans. If you get a conventional mortgage, you'll only pay, on average, about $3,745 in closing costs. FHA loans also have higher down payment requirements.