If you're currently looking for a mortgage to purchase your next home, you're likely considering an FHA loan. This is a government-backed loan that has some more relaxed terms compared to a conventional mortgage, which can make it a practical mortgage product for you. Here is what you need to know about this type of loan so that you can figure out if it's the right choice.
FHA Loan Advantages
The main thing that people love about FHA loans is that they do not have a very large down payment requirement, and you only need 3.5% of the purchase price of the home. You can also use a gift from a family member and apply it to that down payment. This makes an FHA loan accessible for many people that do not have a lot of cash on hand but want to buy a home.
FHA loans are also a bit more flexible when it comes to your debt-to-income ratio, with you being allowed to have more of your debt go toward housing costs. When compared to a conventional loan, an FHA will allow 31% to go toward housing-related debt rather than 28%. This can make a big difference if you do not make that much money.
FHA Loan Disadvantages
FHA loans require you to hold mortgage insurance. Unlike private mortgage insurance that can go away once you've paid off 20% of the home, FHA mortgage insurance will last for the entire life of the loan. The primary way to get rid of the mortgage insurance is to refinance your home with a conventional mortgage once you have 20% equity.
An FHA loan is also quite limited when it comes to the options of what kind of loan you can get. Only expect to pick between a 15- and a 30-year mortgage, which means you can't take advantage of a short-term adjustable-rate mortgage if you know you won't be staying in the home for a long time. While this may be fine for most people that want a 30-year mortgage and the lowest possible monthly payment, it may not be ideal for others.
Not sure if you should get an FHA loan? Meet with a mortgage lender in your area for more information, like Right Trac Financial. They can tell you what types of mortgage you qualify for so you can make a more informed decision as you look at home loans.