When you're preparing to buy your first home, one of the most important steps you'll need to take is that of securing a mortgage. However, with so many different loan options out there, it can be difficult deciding on one that's right for you. For many first-time buyers, Federal Housing Administration (FHA) loans are a practical option to consider.
What is an FHA Loan, Anyway?
Specifically, an FHA loan refers to one that is backed by the United States Federal Housing Administration. These loans are designed for the purchase of any owner-occupied residence, meaning you don't have necessarily have to use it to buy a single-family home. Condominiums, townhomes, and other types of residences are also fair-game--as long as you plan on living in the home full-time and not using it as an investment property.
Advantages of an FHA Loan
Even though you don't have to be a first-time buyer to take out an FHA loan, these are a popular mortgage options among first-time buyers for a number of reasons. For starters, there is only a 3.5% down payment required on an FHA loan; this means you can buy a home without having to save up a 20% down payment (as is required with a conventional loan).
Meanwhile, FHA loans are quite forgiving when it comes to credit scores. You only need to have a 580 or higher credit score to qualify for an FHA loan at a 3.5% down payment. Even if your credit score is below 580, you can still get approved--though you may be required to make a larger down payment of up to 10%.
Potential Drawbacks of an FHA Loan
Like any loan type, an FHA loan can come with some potential disadvantages as well. The biggest drawback to be aware of with an FHA loan is that if you make less than a 20% down payment, you will likely be required by your lender to pay for private mortgage insurance (PMI) until you've paid off at least 20% of your home's value. PMI can easily cost anywhere from $30 to $70 per month, which can really add up over the course of a year.
Is an FHA Loan Right For You?
For many first-time buyers, an FHA loan is a sensible mortgage option due to its minimal qualification requirements and low down payment. If you're interested in getting pre-qualified or finding out more about FHA loans, explore mortgage lenders near you that offer this popular type of financing.