Is it a good idea to get a FHA loan?
FHA Loan: Cons
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
FHA Loan: Cons
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
You still need decent credit for an FHA loan. While we didn't have ultrahigh credit scores, getting an FHA loan wasn't a free-for-all: Buyers must have a 580 credit score to take advantage of the 3.5% down payment option. Lenders also have a stake, and will often demand a credit score of 600 or higher to qualify.
While conventional mortgages usually require a credit score of 620 or more, FHA loans are open to borrowers with credit scores as low as 500. You don't need a big down payment. If your credit score is 580 or more, you could qualify to put down just 3.5%. Interest rates are competitive.
The Bottom Line. Deciding between an FHA loan and a conventional loan depends on your financial situation. An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
FHA mortgage rates are often lower than rates for conventional mortgages. However, a lower interest rate does not always equate to a lower monthly payment. FHA mortgage insurance will increase your payments and the overall cost of the loan, even if the base rate is lower than for other loan types.
Both the buyer and seller are responsible for covering different closings costs associated with the transaction. Some fees may be negotiated between the parties, while other fees (particularly lender fees and government fees) are not negotiable.
The Bottom Line: Sellers Can Refuse FHA Loan Offers
Until then, striving for conventional loan approval may be a more straightforward option, if it's financially possible for you. Ready to take the next step toward homeownership?
FHA loans can only be used to finance a primary residence and may not be used to finance a second home, vacation home or rental property. High Debt Ratios. While FHA loans can be much more forgiving compared to other types of loans one of the reasons an FHA application is declined is due to high debt-to-income ratios.
How fast is a FHA loan approved?
The typical timeline from application to closing with an FHA loan ranges from 30 to 45 days. During this time, your loan file goes through underwriting. The underwriter takes a closer look at your application and reviews supporting documents to ensure you meet the minimum guidelines for FHA financing.
No, FHA loans don't have a set minimum income requirement. However, lenders will assess your income in relation to your monthly debts. They'll look at your debt-to-income ratio (DTI) to determine if you can manage your mortgage payments.
Minimum credit score: 500-580
If you want to put just 3.5 percent down, the minimum credit score for an FHA loan is 580. You can qualify with a score as low as 500, but you'll need to make at least a 10 percent down payment.
The general rule of thumb is to plan on having between 3% – 6% of your total loan amount on hand for closing costs. The closing costs that come along with an FHA loan are generally the same as conventional ones, although the mix of costs and fees might look a little different.
The Bottom Line
While some sellers aren't fans of FHA loans, plenty of sellers would be happy to accept an FHA mortgage. Whether you decide on an FHA loan or a conventional loan, you'll want to be ready to make an offer on a home without delay.
With both types of loans, the lender sets the interest rate, determined primarily by your credit score. FHA loans sometimes have more favorable interest rates than conventional loans — but the difference is often offset by the greater number of fees, including the MIP charges, that they have.
Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.
If you put 20% down on an FHA loan, you would pay a lower annual mortgage insurance premium. The premium requirement would also stop after 11 years. However, if you have 20% to put down and your credit score is 620 or higher, you may want to pursue a conventional loan instead.
A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. But an FHA loan can be perfect if your credit score is in the high-500s or low-600s. For lower-credit borrowers, FHA is often the cheaper option. These are only general guidelines, though.
FHA Rates for 700 Credit Score
The national average 30-year FHA mortgage interest rate is 6.85%. The average FHA 203(b) loan rate is 3.28%. As of mid-August 2023, a 700 credit score could secure an interest rate of 6.796% for a 30-year fixed-rate mortgage loan of $300,000.
How long does it take to close on a FHA loan?
To recap: The FHA loan process in California can take anywhere from a month to 45 days, on average. That's from the time you first submit an application, to the final closing and funding process.
Effects on Price During Buying Process
That means the seller may still be able to sell at the agreed-upon price or a price close to it. With FHA loans, their hands are tied – they either lower the price or list the home again. If they do decide to list the home again, the appraisal stays with the property for 120 days.
Borrowers pay an average of $7,402 in closing costs when taking out FHA loans. If you get a conventional mortgage, you'll only pay, on average, about $3,745 in closing costs. FHA loans also have higher down payment requirements.
Depending on which FHA lender you work with, you might be able to negotiate some fees. Typical FHA loan fees include: Origination fee. Underwriting fee.
Value Concerns
Furthermore, you are stuck with that FHA appraisal for 120 days. You must use that value for future FHA offers until 120 days pass. The FHA buyer is allowed to make up the appraisal gap in cash, but most FHA buyers don't have extra money to throw at the deal.
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