Is an FHA loan right for you?

By Michele Lerner
Mortgage Credit Problems Columnist

Since the 1930s, home loans insured by the Federal Housing Administration (FHA) have been in place to improve home-ownership rates among low- and moderate-income consumers. FHA loans, while attractive to first-time home buyers, are available to all borrowers who qualify regardless of whether you are purchasing your first home, refinancing your home or are a repeat buyer. FHA home loans are available regardless of your income level, but they are restricted by maximum loan amounts which vary according to the housing costs in your county.

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If you think you may need a bad credit mortgage, complete the form on this page to check out your options for an FHA mortgage.

Why choose an FHA loan?

You should consult with a lender and compare your options for a conventional loan and an FHA loan. FHA loans are typically most appealing to borrowers who lack cash because they have a lower down payment requirement than conventional loans. In addition, because the insurance premiums paid by FHA borrowers will pay the lender if you default on your loan, lenders are typically more lenient in terms of your credit requirements, cash reserves and debt-to-income ratio.

The pros of an FHA loan

  • Lenient qualifications. FHA lenders typically require a credit score of 620 or 640 and may allow you to have a debt-to-income ratio as high as 45 percent, while conventional loans usually require higher credit scores and lower debt-to-income ratios.
  • Low down payment. While some conventional loans are available with a 5 percent down payment, borrowers with poor credit typically need to make a higher down payment. FHA loans require a down payment of just 3.5 percent.

The cons of an FHA loan

  • Insurance premiums. FHA loan requirements include both up-front and annual mortgage insurance premiums. The up-front insurance can be wrapped into the loan balance, but the annual insurance must be paid monthly. Private mortgage insurance (PMI), required on conventional loans with a down payment of less than 20 percent, can be paid monthly, wrapped into the loan balance or paid by the lender, who will charge you a slightly higher interest rate.
  • Insurance premiums can't be cancelled. Beginning in January 2013, FHA mortgage insurance premiums must be paid throughout the loan term. PMI can be cancelled once your loan balance decreases to 78 percent of your home's value.

Complete the form on this page to start the process of choosing the right loan for you.

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