Financing Your Home with an FHA Loan

Stacy Abbott, USU Extension Housing Expert

Finding financing to purchase a home can be overwhelming. There are a variety of loan products available, not to mention the number of lenders that are offering financing.  FHA financing could be the answer for purchasing your next home. Here is a list of the features of a FHA Mortgage: ​

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Lower down payment requirement.  With a down payment requirement of only 3.5%, FHA financing makes home ownership more achievable. On a $200,000 home value a 3.5% down payment would be equal $7,000. That is much less than the $20,000-$40,000 that may be required with a conventional mortgage for the same home value. 

More generous debt-to-income ratios. The amount a consumer can borrow is based on a debt-to-income ratio. Debt-to-income ratios are calculated by dividing the households total monthly debt payments including the mortgage payment by the gross monthly income. (Debt to Income Ratio = Monthly Debt Payments / Gross Monthly Income) At 43%, FHA has a more lenient debt-to-income ratio when compared to the standard conventional mortgage ratio of 36%. FHA borrowers with 10% down payment may be able to qualify with a debt-to-income ratio as high as 50%.

Lenient credit score requirement. Borrowers with lower credit scores typically have an easier time accessing FHA financing versus other mortgage loans. The minimum credit score for an FHA mortgage is 580 whereas a conventional loan usually requires a credit score of 620 or higher. 

Mortgage insurance is required and may continue for the full term of the mortgage. In most mortgage transactions, mortgage insurance is charged to borrowers who have less than a 20% down payment. This insurance is paid by the borrower to protect the lender in the event that the borrower is unable to make the mortgage payment. With FHA financing, this insurance will be charged as an upfront fee and as a monthly fee. If the borrower pays less than a 10% down payment, the monthly charge will continue for the life of the loan. In this case, the mortgage insurance could only be removed by refinancing. Borrowers with a higher down payment could remove the mortgage insurance earlier.