Understanding When an FHA Loan Makes Sense for Homebuyers
As a potential homebuyer, you may be considering different financing options, including Federal Housing Administration (FHA) loans and conventional loans. In a recent conversation between a real estate agent and a mortgage lender, they discussed the situations in which an FHA loan might make sense for a borrower.
Jennifer Zoeller, a real estate agent with Realty Executives Integrity, and TJ Ebert, a mortgage lender with Guidance Mortgage, shared their insights on when an FHA loan could be a better option than a conventional loan.
When does an FHA loan make sense?
According to Ebert, there are three main factors that could make an FHA loan a better choice for a borrower:
Lower Credit Score: If a borrower doesn't have a high credit score, an FHA loan might make sense. Ebert clarifies that it doesn't mean you need to have a bad credit score, simply not a really high credit score.
Lower Down Payment: If a borrower doesn't have enough funds for a down payment that meets the limits of a conventional loan, an FHA loan might make sense. While a conventional loan typically requires a 5% down payment, an FHA loan only needs 3.5%.
Higher Debt-to-Income Ratio: If a borrower's debts are slightly more than what a conventional loan would be eligible for, an FHA loan might make sense. Ebert explains that an FHA loan has a higher threshold when it comes to a monthly debt-to-income ratio than a conventional loan.
Other situations where an FHA loan might make sense
Zoeller adds that getting a divorce could be another situation where an FHA loan might make sense. She explains that the misconception of FHA loans being only for first-time homebuyers is not true, and that those going through a divorce may not be first-time buyers but could still benefit from an FHA loan.
Conclusion
An FHA loan can be a great option for those who don't have a high credit score, enough funds for a larger down payment, or a higher debt-to-income ratio. Additionally, for those going through a divorce or facing other financial challenges, an FHA loan could still be a viable option. However, it's important to speak with a knowledgeable lender who can help you determine the best financing option for your unique situation.