When is FHA the Best Loan?
What is the best loan for a first time home buyer?
FHA loans get a bad rap, but I don’t believe that FHA is a bad option at all. FHA financing is a vital and highly effective tool for homebuyers and homeowners in today’s real estate marketplace.
Why FHA Might be the Best Loan
The short answer is absolutely not. What makes one loan “better” than the next depends completely your personal goals and financial situation.
Advantages of FHA vs Conventional:
- FHA is the best loan for interest rates
- FHA allows higher debt to income ratios
- FHA allows higher loan to value
- FHA tends to have lower closing costs
FHA Interest Rates – As of the writing of this article, I am seeing conventional interest rates coming in about .25% to .375% higher than FHA interest rates. This may not always be the case. Always check with your lender for current rates and qualifying guidelines.
FHA Debt to Income Ratios – This is one of the greatest advantages of FHA financing. Conventional mortgages will limit your debt to income ratio to 45% in most cases, and allow up to 50% in cases that include compensating factors like low loan to value and savings.
FHA Loan to Value – If you are buying a home using FHA financing, your down payment can be as little as 3.5% of the purchase price. The minimum down payment required when using Conventional financing is 5%.
FHA Closing Costs – There are several differences between FHA and Conventional in terms of closing costs. The elephant in the room is that FHA requires that upfront mortgage insurance premium. This premium can be financed into the loan or paid out of pocket to keep the loan balance from increasing.
Conventional financing commonly includes closing cost fees tied to loan to value and credit score that can far exceed fees charged on FHA financing.
These fees are called Loan Level Price Adjustments (LLPA) and are typically absorbed into the interest rate. This results in even higher interest rates for Conventional financing.
Making Educated Decisions
I often speak with homeowners and homebuyers that already have an idea of what type of home loan they want to apply for.
The reality is that if you qualify for one loan, you may qualify for other loan options or they may be within reasonable financial reach.
If you have questions about which option is best for you, feel free to ask questions or leave comments below, give us a call, or shoot me an email if you have a specific question about your individual circumstances.