Here’s why an FHA loan could be a good fit.
If you are looking to buy a home, you will likely need one mortgage to finance it. You could sign up for one conventional loan. Another option is to apply for one FHA loans – a mortgage secured by the Federal Housing Administration. Here is why an FHA loan can be a great solution for you.
1. You don’t have a lot of money to pay for a deposit
Some traditional mortgage lenders let you buy a home with just a 5% discount on completion. But often you need to earn at least 10% depositMany lenders require a down payment of up to 20%. If you don’t have enough funds to make a home purchase, an FHA loan might be a better choice. With an FHA loan, you can buy a home with as little as 3.5% off.
And if you need more help, keep reading our guide how to buy a home without a down payment can help.
2. Your credit score is not good
The minimum Credit score 620 is required to qualify for a conventional mortgage, but it is not uncommon for individual lenders to set even higher standards. In times of economic uncertainty, lenders will often tighten their requirements and set higher creditworthiness thresholds to protect themselves. The great thing about FHA loans is that they have much lower credit requirements. You can generally qualify with as little as 580 points.
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3. You recently filed for bankruptcy
A chapter 7 bankruptcyThis is a personal liquidation and can have a negative impact on your bankroll for many years. In fact, after submitting Chapter 7, you typically have to wait at least four years to qualify for a conventional mortgage. On the other hand, you may be eligible for an FHA loan only two years after a Chapter 7 bankruptcy. Now there are some limitations here. To get a mortgage so soon after a Chapter 7, you have to Build a decent credit score and avoid taking on too much additional debt. However, a post-bankrupt FHA loan usually gives you more leeway than a traditional mortgage.
Should You Get an FHA Loan?
FHA loan are not perfect. The only major disadvantage of an FHA loan is that you will be charged an upfront mortgage insurance premium. This is to protect your lender in the event that you cannot keep up with your mortgage payments. In addition, you have to pay ongoing monthly mortgage insurance premiums which make your home more expensive.
However, if you don’t have a lot of cash to pay for a down payment, your credit rating is poor, or you want to buy a home soon after filing for bankruptcy, an FHA loan could be a good solution for you. And like any mortgage you get, it’s worth shopping at various FHA lenders. This way you can compare the quotes you get and see which one gives you the maximum saving.
For more information on loan options, see our Beginner’s Guide to Home Loans.