Low Down Payment
The most common reason to use an FHA loan is its minimum 3.5% down payment if your credit score is 580 or higher. For many first time buyers, this relatively low amount is manageable and allows you to become a homeowner years sooner than if you had to save more money, especially in higher priced real estate markets. If your score is under 580, a minimum of 10% of the purchase price is required.
Gifts for Down Payment
FHA allows you to receive a gift from a family member (please ask for a list of acceptable family members), an employer, a charitable organization, or a close friend with a clearly defined and documented interest in you, the borrower. The last option can be more difficult to document and may be up to the underwriter’s discretion.
Lower Credit Scores
Lower credit score requirements are the second most common reason to use an FHA loan. Combined with a low down payment, a low credit score can mean costly private mortgage insurance when using a conventional loan. The mortgage insurance rates for FHA loans are fixed for everyone, which means you won’t pay more for a lower credit score.
Lowest Down Payment Available for 2-4 Units
If you want to buy a home but also want tenants to help pay your mortgage, a 2-4 unit property can put you in a great financial position. While conventional loans will require substantially more money down on a 2-4 unit property, FHA loans still only need 3.5% down. Many real estate investors get started this way. They live in one unit and rent the others out, gaining property management experience while saving money each month for future purchases.
Up to 6% of Purchase Price in Seller Credits Towards Closing Costs
Larger seller credits are allowed to help with closing costs. In some lower priced markets, closing costs can be more than the average 2-3% of the purchase price. If you’re really trying to limit out of pocket funds at closing, a seller credit may be the best way to achieve that. FHA loans allow the seller to contribute up to 6% toward your closing costs, compared to just 3% on a low down payment conventional loan.
Higher Debt to Income Ratio
FHA loans allow you to stretch your budget and spend a higher percentage of your monthly income on housing. While not ideal, it may be the only option to buy a home in high cost areas.
Student loan debt that is deferred, as most student loans are due to the pandemic, is counted toward your monthly debt as a lower percentage (0.5%) of the outstanding balance than other programs.
Recent Bankruptcy, Short Sale, or Foreclosure
FHA loans allow you to buy a home again with a shorter waiting period after bankruptcy, short sale, or foreclosure.