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FHA Loans for Military Members

Thinking of buying a new home? FHA home loans are a great government-backed mortgage option for servicemembers and civilians alike. These loans can require a down payment as low as 3.5% of the appraised home value and might allow a credit score as low as 580, although it may vary by lender. Because they’re an affordable option, FHA loans are an excellent choice for many first-time homebuyers, especially those with little savings or who are struggling with credit issues. However, the lower the credit score, the higher the interest rate and required down payment.

What Is an FHA Home Loan?

An FHA loan is a type of mortgage that is backed by the Federal Housing Administration (FHA). Because the FHA insures the mortgage — meaning they will cover the loan in case of a default — the loan is less risky for lenders. Therefore, lenders can accept lower down payments (as little as 3.5% with minimum 580 credit score) and are more willing to loan money to people with lower credit scores. As with any mortgage loan, you’ll repay the loan through your monthly FHA mortgage payment, however, your monthly payments will include an annual Mortgage Insurance Premium (MIP), unless you pay that MIP upfront.

How Can an FHA Mortgage Loan Be Used?

FHA loans can be used to purchase or refinance a single-family home, condominium, as well as a multi-family unit up to four units. Some loans can also be used for new construction or home renovations, including energy-efficient upgrades. Each of these types of loans has limits. Here are some examples:

  • Basic home mortgages must be on a house that only requires $5,000 or less in repairs.
  • Construction loans can be used to purchase land and build a new home, but the qualification process is more difficult and takes a little longer.

All FHA loans have mortgage limits based on the county in which you live. For example, limits for 2021 ranged from $356,362 for low-cost counties, to $822,375 in the highest-cost counties on one-unit properties. Additionally, a property must meet FHA loan requirements, which include an assessment and an FHA inspection.

Who Is Eligible for an FHA Loan?

FHA loans are often easier to qualify for than other conventional loans due to lower required credit scores and lower down payments. However, there are still some stipulations:

  • Your credit score must be at least 500 to qualify. If your credit score is between 500 and 579, you will be required to make a higher down payment than if your score is higher than 579. The amount may vary by lender. Also note that although FHA has not changed its requirements, many lenders have raised the minimum credit score they require to at least 580.

  • You must have money for a down payment. With an FHA home loan, the down payment may be as low as 3.5% but could be as much as 10%, depending on your credit score and the lender. However, you can use money gifted to you from a family member towards a down payment, as long as the donor provides a letter stating that no repayment is expected.

  • Your debt-to-income ratio (DTI) must be less than 50%, which means that your monthly debt payments are not more than 50% of your pretax income. If you haven’t calculated your DTI since the new student loan debt calculation was announced in June 2021, be sure to do so.

Which Is Better: FHA or VA Home Loans?

While military FHA loans are certainly available, they aren’t necessarily a better option than a VA Home Loan. Here are some major differences to help you determine if an FHA mortgage is right for you:

1. Down Payment

With a VA Home Loan, servicemembers and Veterans may not have to pay a down payment. FHA loans, however, require a down payment of at least 3.5%, which is less than some other home loans, but that is still money out of your pocket that could otherwise be used for your home maintenance fund, furniture, or home improvements.

2. Mortgage Insurance

VA Home Loans require VA Funding Fees while FHA mortgages include an annual Mortgage Insurance Premium or MIP instead of private mortgage insurance (PMI) requirements that are paid on conventional mortgages with less than 20% down. An AAFMAA Mortgage Services LLC (AMS) Military Mortgage Advisor can help you determine how these compare and what would be best based on your individual situation.

3. Credit Scores

FHA Loan requirements state the borrower must have at least a 580 credit score. VA Home Loans don’t have a set minimum. However, for both types of loans, lenders may require borrowers to have a set minimum score before they’ll provide a loan.

4. Home Value

Both VA Home Loans and FHA loans have limits on how much house you can buy with a basic loan. However, VA Home Loans will let you go higher with the set limit if you qualify for a jumbo loan, but you will just have to pay a down payment.

Work with AMS to Find the Right Loan

In many situations, a VA military home loan is a better option for servicemembers and Veterans than an FHA loan, but not always. AMS offers both types of loans and one of our Military Mortgage Advisors can talk with you about your specific situation and needs. To learn more or to get prequalified, contact us today or call us at (877) 387-6856.