by Jon Silver
If you are looking for a home loan but have average credit and low down payment, you might think that getting a mortgage is a long shot. Actually, it may be easier than you think! An FHA loan could be the ticket to get you into your dream home. Below is more about the FHA loan requirements in regards to credit standards, loan to value, income ratios and more.
An FHA loan is guaranteed by the Federal Housing Administration. Borrowers who use an FHA mortgage must pay for mortgage insurance as this protects the lender if you default. Still, FHA guidelines can be an excellent mortgage opportunity for many people. People get FHA loans because lenders offer these loans at very attractive rates and down payments. Below are seven requirements for getting an FHA loan:
#1 Credit Required
One of the biggest advantages of FHA requirements is that the minimum credit score for a loan down payment loan of 3.5% is available to those with a score as low as 620. It will make it easier if your score is higher than that, but there are some FHA lenders who will consider your application at a 620 FICO score. If you have credit lower than that, you will need to have at least a 10% down payment. The absolute lowest credit score that you can have to get approved is 500. FHA credit score requirements are considered very aggressive, but the Direct Endorsed underwriting involved in approving home loans allows for more flexibility because it considers additional and compensating factors.
#2 Down Payment OF 3.5% Required
Most FHA down payment requirement is only 3.5%. This is of course a major attraction for these loans and makes home ownership a real possibility for many more people. Even better, FHA allows you to use family gifts to make your down payment, or a grant from a state or local government assistance program. If you put more money down, you may be able to get a higher interest rate, but it is not necessary to get an FHA loan. The FHA down-payment remains one of the most attractive characteristics to first time house buyers. If you are looking for a FHA mortgage with nothing down you will need to be buying a house in a state that allows down-payment assistance that essentially makes FHA financing into a zero down home loan. This is tricky but possible in states that cooperate with government grants for down-payments.
#3 Closing Costs Still Must Be Paid
All mortgage loans have closing costs, including appraisal, credit report and title expenses. However, FHA will allow you to have the seller pay some of the closing costs. Or, the lender may even agree to pay closing costs. Note that lenders will usually charge a higher interest rate if they pay your closing costs. When shopping ask the loan agents about FHA first time home buyer options with limited closing cost options.
#4 Lender Has to Be Approved by FHA
FHA is not a lender. It is a government agency that insures the loan against default. So you will need to get a loan through a lender approved by FHA. Not every FHA lender will offer identical rates and closing costs. In fact, the terms on the exact same loan for different lenders can be quite different, so it pays to shop around. When you are ready, shop and review FHA rates today advertised by companies that you trust.
#5 Mortgage Insurance Required
The major downside of FHA loans is that two mortgage insurance premiums are required. One of them is an upfront premium of 1.75% of the loan amount. This would be $1750 for a $100,000 loan. The upfront insurance premium is paid when you get the loan. It can be rolled into the total loan amount. The other is the annual premium insurance that you pay each month. It will vary based upon how long your loan is, how much you borrowed and the loan to value ratio. If you have a 30 year loan with less than 5% down, you will pay .85% of the amount borrowed per year. If you want to get out of paying mortgage insurance, you have the option of refinancing your FHA mortgage once you have 20% equity in the home. What is FHA mortgage insurance?
#6 Repair Costs Can Be Financed
People who buy homes financed by FHA may need to make substantial repairs to make the home livable. Fortunately, FHA has special loan products that can help borrowers who need cash to make repairs. This is known as a 203k loan. The best part about this program is that the amount you can borrow is not based upon the current appraised value. Instead, it is based upon the after repair value. A 203(k) loan allows you to borrow up to $35,000 for nonstructural repairs. Since the FHA allows home rehabilitation to be wrapped into a loan it often helps borrowers overcome FHA appraisal requirements when the value doesn't come in where it needs to.
#7 Financial Hardship Help
You must pay your mortgage each month on time like any other mortgage. If you do not, you risk foreclosure and damage to your credit. However, people who suffer a serious financial problem may be able to get help from FHA. FHA can speak to your lender on your behalf and may be able to get a forbearance period, a loan modification that would drop the interest rate, or extend the mortgage loan term.
The FHA-insured loan is one of the best options on the market for people who do not have a 20% down payment and have average or poor credit. Because FHA-approved lenders have more flexibility in their lending standards, using an FHA loan can be a great way to get into the home of your dreams.
Are you interested in buying a home in 2017 and have average credit and/or little money to put down? There was a time a few years ago when it would have been difficult to buy a home unless you had stellar credit and 20% down, but today you have plenty of options to buy your first home.
One of your best home loan options in 2017 is without a doubt the FHA mortgage. FHA loans are guaranteed by the Federal Housing Administration, which is part of the US Department of Housing and Urban Development.
FHA does not issue loans itself. Instead, it guarantees the loan against default. Thus, if a mortgage lender gives you a mortgage and you default, the FHA will pay back the lender most of their losses.
This FHA guarantee is incredibly important for millions of potential homebuyers across the United States. If you have low or moderate income, if you have poor credit, and if you have only a limited amount for a down payment, you are often excluded from qualifying for a conventional mortgage loan. The FHA loan gives you hope and millions of Americans over the years have been able to buy their first home with an FHA loan.
If you are ready to buy your first home in 2017, here is what you need to know about FHA loans:
Have you tried to apply for a conventional loan with bad credit? Then you know that you are pretty much prevented from getting a home loan. Most conventional lenders in 2017 still want to see credit above 700 to qualify for a loan.
With an FHA-backed loan, you have much more latitude in terms of your credit score. Some FHA lenders will allow you to have a credit score as low as 580 to qualify for a home loan! If you know much about credit scores, you know 580 is a very bad score. In fact, people with a 580 credit score may have a foreclosure or two on their record. But this does not preclude you from getting approved for a loan.
As we stated earlier, FHA insures your home loan. If you default, the lender is reimbursed. So, people with low credit scores still may be approved. Notice however we said 'may.' If you have credit below 600, you will likely need to check with several FHA-approved lenders to be approved for a mortgage loan.
If your credit is better – in the 600 to 640 range – you will have many more loan options. In fact, if you have credit that is 640 or above – still a very average score – most FHA-approved lenders will work with you.
One of the most popular features of FHA loans is the 3.5% down possibility. In the days before the 2009 mortgage crash, 100% financing loans were commonplace. Those days are long gone. The only 100% financing options today are VA and USDA loans.
But FHA loans are the next best thing! You can buy a home for as little as 3.5% down. On a loan of $200,000, that is a mere $7500. That is within the means of most Americans who save for a year.
Historically, having to put 20% down to buy a home was the major obstacle to most people becoming homeowners. Twenty percent was the standard for many years, but that is very challenging today for those who are buying their first home. With an FHA loan and low down payment, buying your first home is so much easier.
If you have a credit score below 620, you may need to put more down, however.
These loans are guaranteed by FHA, so the underwriting standards for these loans are much more flexible. Most lenders want to see front end and back in debt ratios of 28% and 36% or lower, respectively. With FHA, the current maximums are a generous 31% and 43%. These can be higher if the lender is convinced that you can afford the payments.
One of the challenges for some homebuyers is buying a home in a more expensive city, such as Los Angeles or New York City. FHA loans allow loan sizes in certain high cost areas up to $636,000. This allows people to put down lower down payments and still qualify for an FHA loan in a more expensive part of the country.
If you live in a lower cost area, FHA is still very generous: You can qualify for a home that costs as much as $424,000. If you had to put 20% down for that property, your down payment would be more than $80,000! But with an FHA loan, you need to only put down less than $15,000.
Some homebuyers do not like having to pay mortgage insurance; this is a requirement in the case that you default and the mortgage must be paid back to the lender.
But we think paying for mortgage insurance is ok: It is allowing you to put down as little as 3.5%! With FHA loans, you must pay an upfront premium that is usually wrapped into the mortgage, as well as an annual premium that you pay as part of your monthly mortgage payment.
FHA loans are a great program for first time home buyers with credit issues or a low down payment. We strongly advise you talk to an FHA-approved lender about getting an FHA loan.
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