Why use an FHA home loan when buying a home?
A lender may offer both a conventional home loan and a FHA home loan. Which should you choose and why?
Both loans are lent by private and public lenders, however, FHA loans are underwritten under FHA guidelines and not private/publicly traded insurer guidelines. This tend to mean that FHA loans have a higher leniency in lending on credit, income and assets vs. a conventional home loan. FHA home loans also tend to have a stricter standard for property inspections vs. conventional home loans.
Here are some types as to why to use a FHA loan over a Conventional Loan.
- If you have some late payments, lack a long history of credit lines, or have other items of derogatory credit in your history a FHA loan maybe more forgiving about these items when you are qualifying.
- If your work history has not been steady or it is only recent you maybe be better suited for a FHA home loan as the guidelines may allow for these items.
- FHA allows a borrower to get a loan at 96.5% of the home's sales price. Many conventional loan products do not lend to this percentage. So you maybe able to borrower more and pay less of a down payment or utilize less first time home buyer programs
Utilize First Time Buyer Programs
- If you are using a down payment assistance and/or a closing cost program it may require you to utilize and get approval for an FHA loan prior to getting approved for the assistance or grant program. You should verify if the program you are using requires a FHA 1st mortgage lien.
FHA Home Inspection
- FHA requires a home to be appraised by an approved appraiser. The appraiser is required to review he property and make sure it meets the FHA standards of lending. This is not a home inspection but the property appraisal may point out more issues vs a conventional appraisal.
FHA Home Loans Allows For More Seller Concessions - A seller concession is the allowable amount a seller can give in the new home purchase towards the buyer's closing cost. In virtually all cases (there are specifics for family related gifting) the seller cannot pay the buyer's down payment but they can contribute towards closing cost, title fee, taxes and other loan related fees. The FHA loan may allow for up-to 6% of the sales price to be given by the seller to the buyer in order to pay those costs. Conventional home loans tend to limit this to 3% seller concessions at high LTV (Loan To Value - the amount borrowed vs the sales price). So an FHA loan may be less money for the borrower to layout in the purchase transaction at settlement.