Knowing if you are prepared to become a homeowner or not has a lot to do with the preparation you put into the process. The best mortgage rates are made available to borrowers who take the time to not only research the best loans on the market, but who also spend time improving their FICO scores prior to submitting final applications.

If you have done all you can to improve your FICO score and saved as much as you can save for a down payment but still do not meet traditional mortgage loan qualifications, you might need to look into applying for an FHA loan.

New to FHA Loans? Here’s What They Are

Because an FHA loan is insured by the federal government, it makes an excellent alternative to traditional mortgages, which typically have more challenging qualification requirements. These types of government-backed loans also tend to offer more lenient and flexible terms. For example, as a first time home buyer you might be facing more financial challenges than borrowers who already own a home with some equity in it.

An FHA loan for first-time homebuyers requires a smaller down payment and offers friendlier monthly repayment terms. This is done to encourage consumers to purchase homes and invest in the U.S. economy and housing market. This is also done to encourage prospective homeowners to purchase homes in specific regions where home ownership and community growth are needed.

FHA loans offer multiple benefits not available through traditional mortgage loans. These benefits might influence your decision to apply for an FHA loan and are worth taking time to consider. The lenient down payment requirement is one such benefit. You might save as much as 16.5 percent over a traditional mortgage down payment when you choose an FHA program instead.

Granted, the amount you save up front might be wrapped into your total loan amount depending on your lender’s policies. For borrowers short on cash at purchase time, however, the benefits of these programs cannot be overlooked.

Traditional mortgage loan programs require minimum FICO scores between 620 and 640 to approve a borrower. FHA-approved lenders often approve applicants with FICO scores as low as 500. This allows even a borrower with sub-par credit to move into a home they otherwise might not obtain.

Finally, the APRs on FHA loans are typically more borrower-friendly. APRs might be as low as three percent. For more information on FHA loan APRs, continue reading the next slide.