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.
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