It’s not always easy to save up for the large down payments that some types of mortgages require. The good news? There are other loan options that can help you reach your homeownership goals. Our FHA loans
, which are insured by the Federal Housing Administration, can be a smart choice if you’re looking for smaller down payment requirements or don’t have perfect credit. If you’re ready to buy but aren’t sure if you can afford a mortgage right now, an FHA loan from Space Coast Credit Union may be the right option for you.
Why FHA Home Loans Are Affordable
The Federal Housing Administration insures FHA mortgages to protect the lender in the event a borrower isn’t able to pay back the loan. The FHA itself doesn’t lend money; the financial institution does, just as with any mortgage loan.
With an FHA loan, borrowers must pay for loan insurance with a mortgage insurance premium (MIP). This mortgage loan insurance is one of the reasons FHA home loans are often the most affordable option for buyers and why lenders are willing to make these loans.
The premiums for FHA loans include an initial 1.75% fee, which can be paid in cash at closing or be added to the amount you’re borrowing, and monthly premiums that will be part of your regular mortgage payments. Several factors will determine the amount of this fee, such as how much you are borrowing and the amount of your down payment. Keep in mind that this mortgage loan insurance is in addition to the homeowners’ property insurance, which will also be a part of your loan payment.
Unlike private mortgage insurance (PMI) on conventional loans, MIP may be required for the full term of the loan. FHA MIP costs fluctuate, so be sure to ask your lender about current rates.
FHA Loan Benefits
FHA home loans help give home-buying power to borrowers who may find qualifying for conventional loans a challenge. Some of the many advantages this home financing option may provide the ability to:
- Buy single-family homes, multi-unit properties such as duplexes, manufactured homes, and condos
- Use gift money or seller assistance to fund the down payment or put toward closing costs
- Qualify even though you may have credit history issues
- Qualify with a down payment of just 3.5% of the loan amount
- Avoid pre-payment penalties
- Potentially have a future buyer of your home assume your FHA loan
Another important benefit is that obtaining a mortgage and making your payments on time is a great way to improve your credit, year by year. Good credit can be the key to qualifying for lower interest rates on vehicle loans and other types of non-mortgage loans that can save you thousands of dollars over time.
How Conventional Loans and FHA Loans Differ
Borrowing money to purchase real estate is likely to be the largest financial transaction you will ever make, so be sure you understand the differences between all of the types of loans that may be available to you. Keep in mind that all loans have their pros and cons.
Conventional loans, often referred to as traditional loans, are the clear leader when it comes to which type is most popular among buyers. According to Bankrate.com, the U.S. Census Bureau reported that conventional loans
accounted for more than 73% of new home sales in 2018’s first quarter. By contrast, FHA loans were second, but made up only 12% of all loans in the same time period.
Generally speaking, FHA loans are often the sole option for people who have low credit scores, high debt-to-income ratios, or limited funds for down payment. Conventional financing is available to borrowers with very good credit.
In the case of FHA loans vs. conventional mortgages, here’s what else you need to know:
- Rates: Interest rates may be lower on FHA loans, but the savings compared to conventional loans may not be significant—in fact, they can even be higher. If you’re considering an FHA mortgage, make sure you have current interest rate information.
- Mortgage insurance: The private mortgage insurance on conventional loans can be cancelled when you have accumulated 80% home equity, refinanced with a minimum of 20% equity, or reached another specified equity milestone. With FHA loans, MIP may increase the balance on your loan and you may not reach any point where you can have MIP removed.
- Down payments: Before you choose an FHA loan, ask your lender to review other types of loans and their respective down payment requirements. Although FHA loans are known for generally requiring a lower down payment, find out if you may be able to qualify for other low down payment loans before making your final decision.
- Limits on loan amounts: Conventional loans usually have higher loan limits. If you’re hoping to purchase a relatively expensive home, FHA loan limits may not be an option for you.
- Residential requirements: Many types of conventional loans can be used to purchase rental or investment properties. FHA loans can be used only for properties that will be the borrower’s primary residence.
- Terms: FHA loans are available with fixed-rate terms of 15 and 30 years, while conventional loans offer more choices in term length. At SCCU, for example, terms for our fixed-rate conventional mortgages include 10, 15, 20, or 30 years.
Note: A VA loan
, which is insured by the U.S. Department of Veterans Affairs, is another mortgage option that can make homeownership more accessible to borrowers with lower or moderate income. You must be an active duty service member, veteran, or widowed military spouse in order to be eligible for a VA loan. VA loans can be obtained with no down payment and no minimum credit score requirement.
FHA Loan Requirements
With all types of mortgage loans, including FHA home loans, you will need to be able to meet a specified set of requirements in order to qualify. While various lenders can have requirements that don’t adhere to minimum requirements set by the FHA, such as higher credit scores, typical mortgage loan requirements include:
- A set minimum down payment
- A qualifying credit score
- A certain ratio of your debt to your income
You should check with your lender for specific information, but generally, requirements for FHA loans may include:
- The ability to maintain a certain level of income in the future
- A down payment of at least 3.5%
- A debt-to-income ratio of 50% or less
- A minimum credit score of 500
- A credit score of 580 or higher to qualify for the lowest down payment amount
If you satisfy all of the requirements of the FHA program and those of your lender, you can’t be denied an FHA loan based on factors identified by Fair Housing laws. That means you cannot be denied based on any factors that are discriminatory.
If you already have a specific property in mind, you should be aware that there are certain housing requirements associated with FHA mortgages. FHA home inspections can be strict and there are standards that must be met regarding structural soundness and whether the property poses any health threats to occupants. The home will need to be appraised as well. You can learn more about Florida FHA loan requirements here
for more details on the requirements for qualifying for an FHA Loan.
FHA Loans From Space Coast Credit Union
If you’re looking for the affordability of an FHA loan and want additional benefits, start with Space Coast Credit Union. These are just some of the features of our FHA home loans:
- You’ll enjoy fast pre-qualified decisions over the phone or online
- Lower credit score requirements are available
- Our loans have more flexible debt-to-income ratio requirements
- We offer expanded co-borrower options
- There is no intangible tax – since SCCU is a non-profit credit union, we are not required to pay Florida Intangible Personal Property Tax
- You can earn thousands in cash rewards with SCCU HomeAdvantage®, available to buyers who select and use a real estate agent in the HomeAdvantage network
- As a member of SCCU, your FHA loan will be serviced by SCCU for the life of the loan
- You’ll also get our mortgage interest rate guarantee: If the comparable SCCU interest rate is lower than your original interest rate five business days prior to closing and the interest rate lock-in hasn’t expired, we will lower the interest rate on your FHA loan five business days before closing
The terms and fees for an SCCU FHA home loan are:
- Terms up to 30 years
- No application fees
- No pre-payment penalties
- An origination fee of $1,100