If you’re preparing to purchase a new home, you’ve probably done a lot of research on the mortgage loan options available to you. While you’ll quickly know whether something like a VA or USDA loan is the right option for you, there are a few other options that you may be considering. Some loans, like FHA loans, may initially seem like a great option for you.
However, you may have heard things about these loans that make you wary of whether they’re right for you. While there are many myths about FHA loans, many of them are just that: myths. In this blog, we’ll help break down some of the most common myths to help you determine whether you should consider applying for an FHA loan when you purchase your next home.
What are FHA Loans?
An FHA loan is a mortgage insured by the Federal Housing Administration. These loans are designed to make homeownership more accessible to people across the United States, especially if they have a less-than-perfect credit score or are first-time homebuyers. Because the loan is backed by the government, lenders are more willing to approve applicants who might not qualify for conventional mortgages.
FHA loans typically require a lower down payment than other mortgage loans. However, borrowers may also pay mortgage insurance premiums to protect lenders in the event of a default, which can increase overall costs. Overall, FHA loans are a popular pathway for buyers seeking affordable entry into homeownership with fewer barriers than some other loans offer.
Common Myths About FHA Loans
1. FHA Loans Are Only for People with Low Credit Scores
One of the biggest misconceptions about FHA loans is that they are only an option for individuals with low credit scores. However, this isn’t the case. While these loans do allow individuals with credit scores under 620 to purchase a home, they aren’t the only people who can get these loans. In fact, 98% of individuals who qualified for an FHA loan in 2021 had a credit score over 600, with 21% of them having a credit score between 700 and 749.
2. These Loans Are Only for First-Time Homebuyers
If you previously used an FHA loan to purchase a home, you might worry that you cannot apply for another when you want to buy a new, larger home. While many first-time homebuyers utilize FHA loans, they aren’t the only people who can benefit from them. As long as the home you are moving into will serve as your primary residence, you can still qualify for another FHA loan. It is, however, important to note that you are not allowed to hold two of these loans at once.
3. You Can Only Use FHA Loans to Purchase Single-Family Homes
While you might be ready to purchase a property, you may not want a single-family home, and instead are interested in something larger. Some people believe you cannot use an FHA loan to purchase a multi-family property. However, these loans do qualify for multi-unit properties, as long as you are going to reside in one of the units. This means that if you’re interested in a duplex, triplex, or fourplex, you don’t need to look for other mortgage loan options.
4. Self-Employed People Don’t Qualify for an FHA Loan
When applying for a mortgage, you may worry about your lack of a W-2 and your ability to qualify for the loan you want. Whether you’re self-employed or receive social security disability, you may think this will impact your ability to be eligible for an FHA loan. However, as long as you have all of the appropriate documentation to support this income, like tax returns and bank statements, this should help you overcome any potential obstacles you may encounter.
5. It Takes a Long Time For the Loan to be Approved
When you apply for a loan, you don’t want to wait months on end for approval. You may have heard that it takes an incredibly long time to receive loan approval. While homes purchased using an FHA loan will require an appraisal to determine their current market value, this shouldn’t lead to major delays. In fact, most FHA loans can be approved just as quickly as any other option you are considering.
6. These Loans Have a Higher Interest Rate Than Other Options
High interest rates can be incredibly daunting for homebuyers, and you may worry that FHA loans generally have a higher interest rate than other options. However, in some cases, an FHA loan may be your best option for getting the lowest interest rate possible. Some homeowners who’ve purchased property with an FHA loan have qualified for loans that are 0.50% lower than any other option they may qualify for, making homeownership less expensive.
7. You Cannot Get an FHA Loan Following a Bankruptcy
If you have previously filed for bankruptcy, you may worry about the way this will impact your loan options. While you can qualify for an FHA loan after a bankruptcy, there is a two-year waiting period following a Chapter 7 bankruptcy and a one-year waiting period following a Chapter 13. As long as you have proven that you can handle this financial responsibility, your bankruptcy shouldn’t impact your eligibility.
Is an FHA Loan Right for You?
If you are wondering whether an FHA loan is right for you, there are a few things to consider. These government-backed mortgages are designed to make homeownership more accessible, but they’re not ideal for every buyer. Consider the following:
- Lower down payment requirements (as little as 3.5%) make it easier for first-time buyers.
- Flexible credit score qualifications help those with less-than-perfect credit.
- Competitive interest rates can make monthly payments more affordable.
- You must pay mortgage insurance premiums, which add to long-term costs.
- Loan limits may restrict the price of the home you can purchase.
If you’re on the fence about whether an FHA loan is right for you, it’s best to reach out to a reliable real estate agent near you. They can help you work through the pros and cons of each mortgage option, including FHA loans, to ensure you’re making the best choice for your financial future.
Helping You Find Your Perfect Home
Whether you’re considering an FHA loan or other mortgage options, our team at Premier Utah Real Estate is here to help you find your perfect property. With over 25 years of experience assisting Utah homebuyers and sellers find and sell their homes, we’re confident that we can help you navigate this process with ease.
When you’re ready to purchase a new home, don’t hesitate to contact us today.
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