Is an FHA Loan Right for Me?

FHA loan

The standard mortgage loan down payment of 20% can be a huge sum of money to many prospective homeowners. If this big number is the main reason you have put off buying a home, consider applying for an FHA loan. An FHA loan will help you finance the purchase of your home without having to put down a huge down payment.


FHA loans prevent would-be home owners from getting priced out of the real estate market.

An FHA loan is backed by the Federal Housing Administration, an agency of the U.S. government. The FHA does not lend you money; instead, they insure the loan used to purchase your home. In the event that you are unable to make payments on your mortgage, the FHA will step in to pay your lender. This makes it less risky for lenders to grant mortgages to buyers with lower down payments or poor credit scores. As long as your credit score is 580 or higher, you can qualify for an FHA loan with a 3.5% down payment. If your credit score is between 500 and 579, your FHA loan will require a 10% down payment.

What You Need to Know (Before You Apply)

fha loan

1. You need a consistent income.

While FHA loans don’t have a set minimum or maximum income requirement, you must prove that you earn a steady income. Pay stubs or yearly tax returns can help you prove that you are a reliable earner. Bonus points if you’ve worked in the same field or for the same employer for a couple of years.

2. Heavy debt can hurt your approval chances.

The FHA is unlikely to approve your application if you already have a lot of existing debt—like auto loan(s), credit card debt, and student or personal loans. An FHA loan officer will analyze your income to determine what percent of your monthly income goes to paying down your debts. As a general rule of thumb, your mortgage shouldn’t be more than 31% of your income before taxes. Additionally, your combined debts should not be more than 41% of your income.


An FHA loan officer won’t approve you for a mortgage if you’ll be paying half your salary toward debts.

3. Lenders favor borrowers with credit scores above the 580 minimum.

While 580 is the minimum credit score the FHA requires to insure your loan with a 3.5% down payment, some of the lenders the FHA works with do have higher credit score requirements. For most lenders, you will have a better chance with a credit score of at least 640.  If your credit score isn’t quite there yet, it can be worth it to take the time to improve your score before applying for an FHA loan.

4. Be realistic about your buying power.

There are limits on how much money you can borrow with an FHA loan. These limits are based on real estate prices in the area(s) where you want to buy a home. If you can afford to buy a huge house with a swimming pool, you likely don’t need an FHA loan to begin with. Keep in mind that FHA loans aren’t just for single-family homes. A smart investment move is to purchase a multi-family housing property with up to four units. Rental income can pay for your monthly mortgage payment (and sometimes more). FHA requirement for purchasing multi-family homes is that you must live in the property for at least a year.

5. You will need mortgage insurance.


Mortgage insurance is an insurance policy for lenders in case the borrower defaults on the loan.

If you have an FHA loan, you must have mortgage insurance. The up front premium for mortgage insurance will be part of your closing costs and is approximately 1.75% of the total loan amount. In addition to the 1.75% upfront cost, you will also have a monthly mortgage insurance premium. This will typically read as mortgage insurance premium (MIP) on your FHA loan statements. Mortgage insurance costs between 0.5% and 1% of your loan value each year. This calculates to ~ $120 a month for a home loan of $195,000.

If you are trying to decide if an FHA loan is right for you, sit down and look at the numbers to make sure you can afford a mortgage payment, mortgage insurance, the down payment, and closing costs. If you think your budget is ready for homeownership, an FHA loan can be a great way to make your dreams a reality!

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