I'm trying to a buy a house this year. My income is good and I don't have much debt, but my credit score isn't great and I don't have a lot of cash in the bank. I know an FHA loan is probably my best option, but does that mean I can only get a 30-year fixed-rate loan?

FHA loans are a good option for borrowers with a low or average credit score and those who don't have a lot of funds for a down payment because you only need 3.5 percent of the home price as a down payment. You can even get that 3.5 percent as a gift if you have someone willing to pay your down payment. FHA loans are particularly good for borrowers who have a credit score between 620 or 640 and up to 700 or so because, as long as you qualify, your mortgage rate will be the same. Conventional mortgage lenders adjust your interest rate incrementally up when your credit score drops below 740.

There are some misunderstandings about FHA loans. Contrary to popular belief, these loans are available whether you owned a home before or not and they are not limited by income. The amount you can borrow is limited according to the cost of homes in the housing market where you want to buy. One other misconception is that there is only one kind of FHA loan. In reality, there are a variety of loan choices.

  • FHA fixed-rate home loans are available for 30 or 15 years. It sounds like you have good income and few bills, so you may want to see if you can comfortably afford a 15-year FHA loan. The payments will be higher than a 30-year loan, but you would have a lower interest rate, would build home equity faster, and pay off the loan earlier so you would actually pay substantially less in interest over the life of the loan.
  • FHA adjustable-rate mortgages (ARMs) are available with one year of fixed payments followed by an annual adjustment in interest rate or a 3/1, 5/1, 7/1 or 10/1 term. Each of these are 30-year loans, they just have a fixed rate for the initial time period followed by an annual adjustment. This loan might be good if you plan to sell your home before the loan adjusts or if you are certain of an increase in income or perhaps an inheritance or bonus you can use to pay off the loan early. The benefit to these loans is that the interest rate is lower.

Consult an FHA lender to discuss your mortgage options.

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