How to Afford a Fixer-Upper
Perhaps your dream home is more of a fixer-upper than a move-in-ready house. Maybe you'd rather start from scratch and design the layout to cater to your lifestyle. If you're hoping to customize your home to make it fit your needs, a regular mortgage may not cover all the building costs and upgrades you want. In cases like this, we recommend exploring construction loans before deciding on a mortgage.
What Is an FHA Loan?
When exploring your payment options for your new home, you have several choices to make. What kind of loan will be best for you? Should you choose a mortgage with a fixed or adjustable rate? How long do you want to take to pay off your loan? The answers to these questions depend on your unique circumstances. If you're a first-time homebuyer, an FHA loan is worth consideration. It provides the most affordable and secure option for financing a home for many people.
An FHA loan is backed by the federal government for a primary residence. Many lenders will approve buyers for a larger amount because the loan is backed by the government, so they are taking on a lower risk.
Who Qualifies for an FHA Loan?
One thing that makes FHA loans so popular is that their qualification standards are more flexible than most other loan types. As with all U.S. housing loans, you must reside legally in the United States, be of legal age, and have a valid Social Security number.
With many loans, you need a credit score of at least 650 or higher, but an FHA loan allows people with lower credit scores to become a homeowner. Even with a low credit score, you must show a good history of honoring debts like student loan payments and have proof of consistent employment that provides enough income to pay for your mortgage. Achieve these prerequisites to get preapproved for an FHA loan.
Benefits of an FHA Loan
FHA loans were created during the Great Depression to enable more people to qualify for home loans while mitigating the risk to lenders. Today, it still holds many benefits of conventional loans, such as:
- Lower down payments: Most loan options require you to put a down payment of 20% or more of the home's price before agreeing to provide your loan. With an FHA loan, you can make a down payment with as little as 3.5% of the home's price, meaning your loan will cover the other 96.5%.
- Fixed interest rates: You'll know how much interest your loan will accrue throughout the repayment period with a fixed interest rate. The other option, an adjustable interest rate, means that your rates change with the economy, and that variability can be both a benefit and a hindrance, depending on how the market changes during your repayment period.
- 15-30 year terms: FHA loans offer two repayment periods — 15 years or 30 years. You can choose how long you want to take to pay off your loan and spend those years knowing there's an end to your monthly mortgage payments.
FHA loans carry one extra cost over other loans — FHA mortgage insurance premiums. Requiring mortgage insurance is common for most lenders, as it protects them from taking significant losses if you default on payments. With FHA loans, you'll need to pay a small upfront premium at closing and the annual premium afterward. Your lender can factor both fees into your monthly mortgage payments, and they each come out to less than 2% of your loan amount.