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6 Common Myths About FHA Loans
As home prices continue to rise, more buyers are considering Federal Housing Administration (FHA) loans to make homeownership more accessible. FHA loans are government-backed mortgages known for their flexible lending criteria, making them a great option for buyers with lower credit scores and smaller down payments. However, misconceptions about FHA loans persist, potentially discouraging buyers from taking advantage of this financing option. Here, we break down six common myths about FHA loans and uncover the truth behind them.
Myth #1: FHA Loans Are Only for Buyers with Bad Credit
Truth: While FHA loans allow borrowers with credit scores as low as 500 to apply, they are not limited to those with bad credit. In fact, the average credit score for FHA borrowers is 683, with 80% of applicants having a credit score of 600 or higher (according to 2024 data from Ellie Mae). This means that borrowers with good or even excellent credit can still benefit from FHA loans.
Myth #2: FHA Loans Are Only for First-Time Home Buyers
Truth: Although FHA loans are popular among first-time home buyers, they are also available to repeat buyers and individuals with low to moderate incomes. Many homebuyers use FHA loans as an affordable financing option, regardless of whether it’s their first home purchase or not.
Myth #3: FHA Loans Have Higher Interest Rates
Truth: Contrary to popular belief, FHA loans often come with competitive interest rates, sometimes even lower than conventional mortgage rates. Borrowers with higher credit scores and larger down payments may qualify for some of the best available rates. It’s essential for buyers to compare both FHA and conventional loan options to find the best fit for their financial situation.
Myth #4: FHA Loans Take Longer to Close
Truth: Many assume FHA loans take significantly longer to close than conventional loans. However, data from 2024 Value Penguin shows that FHA and conventional loans take roughly the same amount of time to close—an average of 47 days. The closing timeline depends more on the lender’s efficiency and the buyer’s preparedness rather than the type of loan.
Myth #5: FHA Loans Can Only Be Used for Single-Family Homes
Truth: FHA loans are versatile and can be used to purchase a variety of property types, including single-family homes, townhouses, HUD-approved condos, and even multifamily properties (up to four units). The only requirement is that the borrower must use one of the units as their primary residence.
Myth #6: FHA Loans Have Income Limits
Truth: Unlike some government-backed loan programs, FHA loans do not have income limits. High-income earners can also qualify, as there are no restrictions on how much a borrower can make to be eligible for an FHA loan.
The Bottom Line
FHA loans offer flexibility, accessibility, and affordability, making them a valuable option for many buyers. Whether you are a first-time homebuyer or a repeat buyer, these government-backed loans can help you achieve your homeownership goals.
Before ruling out FHA financing, consult with a mortgage professional to explore your eligibility and compare loan options. Don’t let myths keep you from securing the home loan that’s right for you!
For more information visit: Motto Mortgage
by Elsa Soto | Sep 28, 2018 | Blog, Buyers, Homeowners, Mortgages, News, Property for Sale
The Cost Of NOT Paying PMI
Saving for a down payment is often the biggest hurdle for a first-time homebuyer as median incomes, rents, and home prices all vary depending on where you live.
There is a common misconception among homebuyers that a 20% down payment is required, and it is this limiting belief that often adds months, and sometimes even years, to the home-buying process.
So, if you can purchase a home with less than a 20% down payment… why aren’t more people doing just that?
One Possible Answer: Private Mortgage Insurance (PMI)
Freddie Mac defines PMI as:
“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.
Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”
As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. The monthly cost of your PMI depends on the home’s value, the amount of your down payment, and your credit score.
Below is a table showing the difference in monthly mortgage payment for a $250,000 home with a 3% down payment and PMI vs. a 20% down payment without PMI:
The first thing you see when looking at the table above is no doubt the added $320 a month that you would be spending on your monthly mortgage cost. The second thing that should stand out is that a 20% down payment is $50,000!
If you are buying your first home, $50,000 is a large sum of money that takes discipline and sacrifice to save. Many first-time buyers save for 5-10 years before buying their homes.
To save $50,000 in 10 years, you would need to save about $420 a month. On the other hand, if you save that same $420 a month, you could afford a 3% down payment in less than a year and a half.
In a recent article by My Mortgage Insider, they explain what could happen in the market while you are waiting to save for a higher down payment:
“The time it takes to save a (larger) down payment could mean higher home prices and tougher qualifying down the road. For many buyers, it could prove much cheaper and quicker to opt for the 3% down mortgage immediately.”
The article went on to say,
“Since renters typically devote a higher percentage of their income to housing than homeowners, providing flexible down payment options can help renters with solid earnings purchase a home – and gain a fixed-rate mortgage with principal and interest payments that will not increase over the life of the loan.”
If the prospect of having to pay PMI is holding you back from buying a home today, Freddie Mac has this advice,
“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”
Based on results of the most recent Home Price Expectation Survey, a homeowner who purchased a $250,000 home in January would gain $50,000 in equity over the next five years based on home price appreciation alone (shown below).
Bottom Line
If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, meet with a professional in your area who can explain your market’s conditions and help you make the best decision for you and your family.
