An FHA loan can grant many borrowers the opportunity to become homeowners – especially those who have a somewhat low credit score and a reasonably high amount of debt. Known to be more forgiving and less restrictive than some other loan types, FHA loans present numerous benefits.
Below, we’ll delve a bit deeper into the advantages of taking out an FHA loan.
A Low Down Payment
One of the most attractive characteristics of an FHA loan is the low down payment requirement. Contrary to traditional beliefs surrounding down payment requirements, you don’t typically need to make a 20% down payment to achieve homeownership.
On an FHA loan, you can access financing for your home with only 3.5% down if you have a credit score of 580 or higher. If you have a score in the 500 – 579 range, the down payment requirement is 10% of the home’s purchase price.
Gift funds can also be used toward your down payment if you have a gift letter to adequately document the transfer of funds and gain approval during the underwriting process. You may also be able to participate in a down payment assistance program if you follow your lender’s verification and documentation process along with your state rules and regulations.
Leniency With Credit History
The same flexibility that FHA loans have with down payments applies to a borrower’s credit history. While most other loan types will require a minimum credit score of 620, you can qualify for an FHA loan with a credit score of 580 (for a 3.5% down payment).
Keep in mind that Rocket Mortgage® requires a minimum credit score of 580 for all FHA loans.
If you find a lender offering a loan to borrowers with a 500 qualifying FICO® Score, be aware that this is considered a subprime loan. As a result, you might be charged a higher interest rate and receive less favorable loan terms. If you’re worried about qualifying for an FHA loan with your current credit score, consider holding off on purchasing a home so you can work on improving your credit.
A Better Interest Rate
Mortgage interest rates are dynamic and affected by the state of the economy as a whole, but that doesn’t mean it’s impossible to bring your rate down. As it is, FHA loans typically offer better fixed interest rates than most other loan types. Adjustable-rate mortgages (ARMs) are also available.
Your interest rate will be determined in part by the broader market interest rate at the time you apply for your loan. Factors like your income, credit score, the amount you plan to borrow, your down payment and the loan term can also affect your mortgage rate.
Flexible DTI Requirements
Your debt-to-income ratio (DTI) compares your monthly debt payments to your income. To calculate your DTI, simply take your total monthly debt payments (including student loan, auto loan, credit card and mortgage payments) and divide this amount by your gross monthly income. The number you get will be your DTI expressed as a percentage.
FHA mortgages give borrowers more leniency with their DTI. According to the FHA, your DTI shouldn’t exceed 43% in certain situations. However, the DTI requirement for FHA loans may be higher or lower, depending on compensating factors like your credit score and cash on-hand.
With an FHA loan, you can also add a co-borrower’s income to give yourself a better chance of loan approval, even if that person won’t be residing in the home. Adding a non-occupant co- borrower, such as a family member or close friend, can give you even more financial flexibility.
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
FHA loans make sense if you don't have much saved for a down payment, or if your credit score isn't in good enough shape to qualify you for a conventional loan.
Federal Housing Administration (FHA) loans are guaranteed by the U.S. government and designed for homeowners who may have lower-than-average credit scores and lack the funds for a big down payment. They require a lower minimum down payment and a lower credit score than many conventional loans.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
Unfortunately, the typical home buyer using an FHA loan is unlikely to have excess cash upfront. If a home buyer has less cash to put toward a down payment, they may be less likely to be approved for a mortgage, depending on the state of their finances.
Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn't diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.
An FHA loan requires a minimum 3.5% down payment for credit scores of 580 and higher. If you can make a 10% down payment, your credit score can be in the 500 – 579 range.
A conventional loan is often better if you have good or excellent credit because your mortgage rate and PMI costs will go down. But an FHA loan can be perfect if your credit score is in the high-500s or low-600s. For lower-credit borrowers, FHA is often the cheaper option.
Despite the lenient FHA loan requirements, it is possible to be denied. The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
Some home sellers see an FHA loan as a “riskier” loan compared to a conventional loan because of the FHA loan's stricter appraisal requirements. Also, the loan's lenient financial requirements for borrowers may leave the seller with a negative perception.
FHA loans are often the best source of a mortgage for certain borrowers that are unable to obtain financing through private lenders. Thus, you may qualify for an FHA loan with a lower credit score and/or greater amounts of debt (and higher debt-to-income).
Unfortunately, sellers often perceive the FHA loan approval process as risky because of the FHA's relatively lenient financial requirements and stricter appraisal and property standards.
Some possibilities would be that the house is part of an HOA or Condo association that does not meet FHA guidelines and is not FHA certified and an other would be that it is in such poor condition that it would not meet FHA appraisal standards.
With a minimum 3.5% down payment for borrowers with a credit score of 580 or higher, FHA loans are often a good fit for first-time home buyers or people with little savings or credit challenges.
FHA loans are meant to help individual homeowners, not to enable property investment. That also means homes cannot be purchased with FHA funds and then be flipped. And of course, minimum property safety standards must be met and will be rigorously inspected during an FHA appraisal.
FHA loans allow lower credit scores and require less elapsed time for major credit problems. Conventional loans, however, may require less paperwork and offer better options to avoid costly mortgage insurance premiums.
The overall structure of the property must be in good enough condition to keep its occupants safe. This means severe structural damage, leakage, dampness, decay or termite damage can cause the property to fail inspection. In such a case, repairs must be made in order for the FHA loan to move forward.
Introduction: My name is Chrissy Homenick, I am a tender, funny, determined, tender, glorious, fancy, enthusiastic person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
