If you're looking to buy a home, you have many potential loan options available to you outside of the typical conventional loan. One loan option you may want to consider is that of a Federal Housing Administration (FHA) loan. Unfortunately, there are quite a few myths floating around about this type of loan. By understanding the truth behind these myths, you can ultimately choose the loan program that best suits your needs.
1. FHA Loans Are Only for First-Time Buyers
One of the biggest misconceptions people have about FHA loans is that you can only use them if you're a first-time home buyer. In reality, there is no limit on the number of times you can take out an FHA loan. While it's true that FHA loans are a popular choice among first-time buyers due to their lenient terms, you can absolutely use an FHA loan to purchase your second, third, fourth, or even tenth home.
2. FHA Loans Require a Large Down Payment
Actually, the opposite is true! FHA loans have among the lowest down payment requirements of all loan programs available. In most cases, borrowers can place as little as 3.5% down on their new home. Even for those with less-than-ideal credit, the required down payment on an FHA loan does not exceed 10%. This is significantly smaller than the standard 20% down payment that is required with a conventional loan.
3. FHA Interest Rates Aren't Competitive
Compared to other types of loan programs, such as conventional and VA loans, FHA interest rates are actually quite competitive. Because these loans are backed by the Federal Housing Administration, lenders take on less risk when they issue an FHA loan, which allows them to offer competitive interest rates for many borrowers.
4. Getting Approved for an FHA Loan is Difficult
The qualification requirements for an FHA loan are actually quite lenient. In terms of credit score, borrowers must have a score of 580 or higher to qualify for a loan with a 3.5% down payment. Even those with credit scores between 500 and 579 may still qualify for an FHA loan with a 10% down payment. Aside from this, the only other major requirements of an FHA loan include proof of steady income/employment and a debt-to-income ratio of less than 43%.
FHA loans are a popular borrowing option, and for good reason. Could an FHA loan be right for you? For more information on loan programs, contact a local lender.