Writers have spilled incredible amounts of ink on the topic of FHA loans, often in the form of advice columns encouraging or discouraging new homebuyers. While there is no shortage of opinionated pieces to be found, it can sometimes be challenging to find just the facts on these necessary financial instruments. If you are a first-time homebuyer, then understanding the difference between FHA and conventional loans is especially crucial. This article will guide you through some of the key points behind Federal Housing Administration-insured loans so that you can make an informed decision for your home purchase.

Busting Some Common Myths

Before explaining the nuts and bolts of FHA loans, it's first essential to dispel two common myths: that FHA loans are only for low-income purchasers and that FHA loans are limited to first-time buyers. Although this particular type of mortgage has significant advantages for buyers that fall into these categories, they are far from the only individuals that can benefit from them. The purpose of FHA loans is to make mortgages and homeownership more widely accessible. In practice, this makes loans of this type applicable to buyers who may have difficulty qualifying for conventional loans for a variety of different reasons.

FHA Basics

Like any loan, many complexities and small details surround FHA mortgages. Understanding these details is essential if you are in the process of applying for a mortgage, but it is sufficient to look at the broad strokes early in the process. In general, an FHA loan has these major advantages and disadvantages when compared to a conventional loan:

• Lower credit score requirements
• Significantly lower down payment requirements
• Mandatory FHA mortgage insurance
• Significant (and strict) qualification requirements

Since FHA loans are open to buyers with inconsistent or poor credit histories, the criteria to qualify can be somewhat strict. Once qualified, however, buyers can choose to put as little as 3.5% down on their purchase. This lower down payment requirement makes FHA loans an attractive option for buyers who may have solid credit, but lack the funds necessary for a conventional 20% down payment.

Deciding If An FHA Loan Is Right For You

As a general rule, FHA loans are most useful for buyers with poor credit, little money for a down payment, or significant lending issues, such as a recent bankruptcy. The mandatory mortgage insurance on FHA loans makes these loans somewhat more expensive over the long term, often making them a poor choice for buyers with more cash on hand or higher credit scores. In these cases, a conventional mortgage is often (although not always) the better option.

When deciding if an FHA loan is right for you, it is crucial to consider all aspects of your purchasing situation. When it doubt, speaking with a financial adviser is often the best way to determine what type of mortgage you should seek out.