When is an FHA loan right to use?

Although FHA loans are available to a large percentage of the population, there are certain individuals for whom FHA loans are ideally suited. Created as a branch of the Department of Housing and Urban Development (HUD) in 1934, FHA was an answer to the financial crises affecting millions of Americans as a result of the Great Depression. Today, FHA loans are predominantly for low- to moderate-income borrowers in need of a low risk loan.

What sets the FHA program apart from conventional loans is that there is no minimum credit score required to qualify for a loan. Instead, the following factors are considered:

Reasonable explanation for less-than-perfect credit

  • On time utility payments
  • No bankruptcies in the past 2 years
  • No foreclosures in the past 3 years

These unique criteria make individuals with some credit slip-ups in the past able to realize their dreams of becoming homeowners.

Another thing to consider when deciding if an FHA loan is right for you is the cost of the home you want to buy. Although there is legislation in Congress right now to reform the FHA loan limits, they are much lower than those of conventional loans. Currently, an FHA loan will only cover 48% of the cost a median priced home in a low cost area and 87% in a high cost area. If the reforms are implemented, FHA loans could cover up to 100% of the cost of a median priced home in some areas in the near future.

When deciding if an FHA loan is a right choice, it is also important to consider the ability to make a down payment. Borrowers taking out an FHA loan must put down a payment that is a minimum of 3% or a maximum of 5% of the total loan. If the borrower has the cash reserves to put down more than 5%, than you may want to think about another loan that will allow them to do this. On the other hand, if 3% is too much, there are organizations that can arrange for gift down payments by sellers or other parties. Much like the loan limit issue, the down payment requirement is looking to be updated by the FHA reforms. In the future, borrowers may be able to take out an FHA loan with zero down.

To learn more about if an FHA loan is right for you, check out The Complete Guide to FHA Loans at The Mortgage Loan Place. The guide includes all of the requirements and a checklist to keep track of your progress in obtaining your loan.