When buying a home, it’s important to choose a mortgage that fits your finances and meets your long-term goals. For buyers with lower credit scores and less money for a down payment, loans backed by the Federal Housing Administration offer an affordable alternative to conventional loans.
If you have a lower credit score or can’t afford a large down payment, then an FHA loan may be your best option. However, if you have good credit and can make a down payment of at least 10% of the purchase price, then an FHA loan may be more expensive for you than a conventional loan.
If you need help affording an FHA loan, there are assistance programs available to help.
Pros and Cons of FHA Loans
Here are some of the pros and cons of FHA loans:
FHA Loan Pros and Cons
| Benefits of FHA Loans | Downsides of FHA Loans |
| — Lower down payment requirements. — Lower minimum credit score. — Better interest rates. — Lower debt-to-income ratio requirements. — Multiple loan types. — Available for nontraditional properties. | — Maximum loan limits. — Upfront and annual mortgage insurance. — Property must meet FHA requirements. — Can be more difficult to compete with buyers who have conventional loans. |
FHA Loans vs. Conventional Loans
Most mortgages are conventional loans. Generally speaking, conventional loans are less expensive than FHA loans, but they’re more difficult to get.
Here’s a look at key differences between FHA and conventional loans:
FHA Loans vs. Conventional Loans
| FHA Loans | Conventional Loans | |
| Minimum Credit Score | 500 | 620 |
| Minimum Down Payment | — 3.5% for people with credit scores of 580 or higher. — 10% for people with credit scores of 500 to 579. | 3%, though mortgage lenders may require more. |
| Mortgage Insurance | 1.75% of the loan amount upfront. 0.45% to 1.05% of the loan amount annually. | Generally required only if the down payment is less than 20% of the purchase price. |
| Loan Term | 15 or 30 years | Eight to 30 years |
| Interest Rate | Tends to be more competitive due to the reduced risk placed on the lender. | Depends on market factors and your financial information. |
| Appraisal | Stricter appraisal. | Standard appraisal. |
FHA Loan Alternatives
If you’ve decided not to get an FHA loan, there are other alternatives to a conventional mortgage:
- VA loan. This type of loan is backed by the Department of Veterans Affairs, and is offered to eligible service members, veterans, and their surviving spouses.
- USDA loan. This type of loan is backed by the Department of Agriculture, and is offered to low- or moderate-income borrowers buying homes in rural areas.
- State and local programs. Loan programs also are offered by state and local governments, and by nonprofit organizations, and are aimed at making homeownership more attainable for low- and moderate-income families.
FAQ
Here are answers to some common questions about FHA loans.
