Could an FHA loan be your best option for mortgage approval?

Home ownership remains a goal for many people — yet it also seems out of reach for a substantial number of prospective homebuyers because the cost of housing is going up.

Saving for a down payment has only gotten harder as well because that vaunted 20 percent gets larger as home prices increase. Add in lower credit scores, and that’s a recipe for not being able to get a traditional mortgage.

However, Federal Housing Administration loans, or FHA loans, change the game for those who may not have the best credit or the best savings.

These loans are backed by the federal government and provide mortgages to buyers who can come up with at least 3 1/2 percent for a down payment and who have decent, if not stellar, credit. FHA loans have helped many make that leap into home ownership.

When an FHA Loan Is the Right Path

Buyers who can meet FHA loan requirements and a few other criteria may find these loans to be exactly what they needed to get approved for a mortgage:

• Decent credit, with scores that are in the 600s at a minimum
• Able to come up with at least 3 1/2 percent for a down payment
• Income that is steady enough to confidently make the mortgage payments every month
• Willingness to pay FHA mortgage insurance

These criteria aren’t that hard to meet. Buyers can raise credit scores and save up that smaller down payment. The insurance is not that pricey and does include options for dropping it a few years down the road if the buyer meets additional qualifications.

Buyers do need to be aware, however, that the exact minimum credit score to qualify can change. In other words, one year it might be fairly low, while the next it could be fairly high, even if it’s still in the 600s. This can be frustrating for people trying to jump into a hot housing market, so patience is necessary.

A Note of Caution

Like other mortgage loans, FHA loans aren’t safe from defaults. They only make it easier to get a mortgage loan. Buyers must take care to have savings in place to cover the payments should there be a job loss or other financial emergency that could affect the person’s income.

A major medical expense, household repair, or other surprise could have consequences if there are no savings to cover it.

The maxim about spending 30 percent of income on housing is a good one to follow. Buyers who apply for an FHA loan should revamp their monthly budget to ensure they have leeway in case other monthly costs increase or in case their income drops.

This includes looking carefully at debt-to-income ratios; in other words, any monthly payments to creditors (other than the mortgage loan) should be a fairly low percentage of monthly income.

As with any loan, buyers should exercise good financial sense when applying for a mortgage. The FHA loan offers those in steady circumstances a better chance of getting into the world of home ownership.