FHA Loan Calculator

One of the most common reasons people choose an FHA loan over a traditional mortgage is the low down payment. Most traditional lenders require you to have a 20 percent down payment at a minimum.

FHA approved lenders only require 3.5 to 10 percent down, which is a substantial difference.

This allows people to realize their dreams of homeownership much earlier than they otherwise would be able to.

Since the Federal Housing Administration guarantees to pay your mortgage in the event that you cant, FHA lenders get peace of mind giving you money for your new home.

Example

With a traditional loan, you would need as much as $40,000 to purchase a $200,000 house. A similar FHA loan would only require you to save $7,000.

Down Payment Assistance

Owning a home is a major part of the American dream. Unfortunately, many first time home buyers struggle with the high down payments needed to get approved for a loan.

In cases where you personally cannot cover even the 3.5 percent down payment, the FHA allows friends or relatives to provide a portion.

Conventional loans generally require that at least five percent of your down payment come from your own savings.

This makes it much easier to put together the money needed for your down payment. Newlyweds can even use money given as gifts for their wedding or honeymoon fund as a way to finance their new home.

Even if you don't have any available savings, your parents, family, or potential partner can contribute the entirety of the down payment and closing costs. This can be a great way to help a loved one get off to a good financial start.

FHA loans are available to people with scores as low as 500-580. Coupled with the low down payment requirements, this allows people with lower financial stability to purchase a home and begin to build up equity and net worth.

Conventional mortgages, by contrast, have much higher credit requirements than FHA loans. Most lenders require potential borrowers to have a minimum 620 credit score.

FHA loans are also much more forgiving of bankruptcies and foreclosures. Conventional lenders usually require as much as seven years after a foreclosure or bankruptcy before they will deal with a buyer.

FHA loans can have more competitive interest rates compared to conventional loans. This applies even to buyers with lower credit scores.

On average, an FHA loan will have an interest rate within about 0.125 percent of a conventional loan. Along with the low down payment, this is of tremendous benefit to homebuyers.

Ask your broker or loan officer for information about the rates available to you. And always compare your loan options before applying for a mortgage.

FHA loans require borrowers to get a form of mortgage insurance, called an MIP.

FHA lenders tack on a 1.75 percent insurance fee at the origination of the loan. They then charge a 0.45 percent to 1.05 percent fee with your mortgage payment.

The exact amount depends on the value and length of your mortgage agreement.

If you're able to get a conventional loan with a down payment less than 20 percent, most lenders will require PMI. This is usually anywhere from 0.5 to one percent of the loan value, paid with your monthly mortgage.

So, why choose an FHA loan?

It all comes down to your credit score and available savings.

In some situations, an FHA loan can be more costly than a conventional mortgage with PMI.

But for people with less than stellar credit or very little savings, an FHA loan could be the best or only option for home ownership.

FHA loans and conventional mortgages both have closing costs ranging from two to five percent. These usually include loan origination fees, appraisal and inspection fees as well as credit reporting and title search fees.

Closing Cost Assistance

One of the advantages of an FHA loan is that it allows the seller to cover some of the closing costs for the buyer if they are motivated to sell. For sellers with homes that have been on the market for a lengthy period, this can be a viable option.

Conventional loans place the burden of closing costs entirely on the buyer. In some cases, this allows a potential buyer who lacks anything other than the 3.5 percent FHA down payment to purchase a home they otherwise would not have.