For over eighty-three years, American consumers have been buying a home with FHA loan financing. People who have less than stellar credit may be under the impression that they have to wait until they have 740 credit to buy a home. This is not true. Of course, there is no charge to complete an FHA loan application today. The Federal Housing Administration does not allow up-front applications fees and there is never a penalty for paying off a FHA loan early.
Find Out Why so Many People Choose FHA Financing to Buy Their First Home
Today, there are options for people who have average to poor credit to buy their own home. With the advantage of government-backed mortgages such as FHA mortgage loans, it is possible for bad credit borrowers to get a home. Stop paying rent this year with and apply for FHA loan financing!
Here are some great reasons to call your mortgage lender today and apply for an FHA loan:
#1 Your Credit Can Stink
That is putting it a bit harshly, but why beat around the bush? The biggest reason you should get an FHA loan is that you can have bad credit. In fact, it is feasible in 2017 to get an FHA home loan with a terrible score of 500. It is not easy: Of course, even with a bad credit FHA loan, You have to show the direct endorsed underwriter that you are able to pay your bills and can afford the mortgage. You may be turned down by several FHA-approved lenders, but it is possible to be approved with a 500 score.
If your score is 580 or higher, things get a lot easier. Borrowers who have a score in the 600s are more likely to be approved. Approved FHA lending companies want to see that you have been paying your bills regularly for the last year or so, and have the income to pay the mortgage.
#2 You Can’t Find a Lower Down Payment Outside of FHA Finance Loans
After credit, the next biggest obstacle to buying a home today is the down payment. The days of 100% financing loans are long behind us, mostly. There are two exceptions:
- The VA house loan – 100% financing is available for some military veterans and active military
- The USDA loan – if you buy a home in a USDA-designated rural area and have ‘low’ income and poor credit, you may get a 100% financing loan
But other than those two exceptions, the down-payment for FHA loans have the lowest requirement around. If you have a credit score of 580 or higher, you may qualify for just a 3.5% down payment. How many people can’t afford a 3.5% down payment? On a $200,000 loan, that is only $7500. If you cannot afford that, we would argue you probably shouldn’t buy a home anyway.
Low Down Payment on FHA Loans
With an FHA loan and a 580+ FICO score, you could put down as little as 3.5% down to buy your home. You would be very hard pressed to put down less money on a home today. Only VA loans and USDA loans offer 100% financing today, but not everyone will qualify for those loans.
#3 FHA Mortgage Rates Are Extremely Low
We are more than halfway through 2017, and rates for FHA loans are well under 4% again. Even though the Federal Reserve hiked its key interest rates three times in the last year or so, mortgage rates have not gone up a great deal. They did rise in early 2017, but President Trump’s economic plans have stalled in Congress, and who knows if Obamacare will ever go away or not.
These facts have introduced some economic uncertainty in the markets. On the plus side, it has kept the lid on mortgage rates. FHA rates are incredibly low. They are in fact usually lower than conventional loan rates.
It seems hard to believe that rates for a bad credit borrower can be under 4%. But FHA guarantees these loans against default. So mortgage lenders can afford to risk giving loans to people who might not otherwise qualify.
People who have bad credit might think that they are stuck with a high rate mortgage. FHA mortgages can be a serious lifesaver. Even with a credit score in the low 600s, you may be able to lock in a very low interest rate.
The reason you can do this with bad credit is FHA loans are guaranteed by the US government. Default on your mortgage, and the government pays off the lender. It is to the mortgage company’s benefit to offer more flexible credit terms to bad credit borrowers in this situation.
It is possible in 2017 to get an FHA rate in the range of 3.75%, which is even lower than conventional loan rates. That is a great deal for a borrower with a subpar credit score.
Fixed and Adjustable Rates Available with FHA Mortgages
You can get either a fixed or adjustable rate mortgage, depending upon your financial situation and risk tolerance. You do not have to get a fixed rate if you would prefer an adjustable five or seven-year mortgage. This can save you a good deal of interest.
#4 FHA Loans Can Be Assumed
Not only are FHA loan limits high, but FHA home loans are assumable as well. This is a little benefit that most people do not know about. An FHA loan can be assumed by another borrower. When it is time to sell your home, your assumable FHA loan can be taken over by another borrower, as long as they qualify.
This isn’t a big deal in a low rate environment sometimes. But if rates spike in the next five years, having a super low sub-4% rate could help to get your house sold fast. Don’t underestimate the value of having an assumable mortgage insured by the FHA.
FHA and the Power of the Assumable Home Loan
Many people are well aware of the major benefits of the FHA loan, but there are other benefits that do not get as much press. If you are thinking of buying your own home in 2017, you should become familiar with both the well known and less well known benefits of the FHA loan.
The Benefit Many Don’t Know
A very unusual benefit of the FHA loan is that it can be assumed. This means that when you sell your home, your buyer can ‘take over’ your FHA loan if they qualify.
Why would people want to take over another party’s loan? Because interest rates change. As of 2017, interest rates on 30-year, fixed rate FHA loans are at or below 4%. It is not likely that rates are going to be this low forever. The Fed continues to slowly ratchet up its key interest rate. As the economy picks up steam in the Trump administration (hopefully, if the Congress passes tax cuts), we can assume that interest rates in the next five years will be higher than today.
If you decide in five years to sell your home, and the rates are 1% higher than right now, your potential buyer may be able to assume your FHA loan. In a 5% rate environment, that buyer may be able to get a 4% loan. Now that is a great deal!
This assumability would make it easier in theory for you to sell your home in a rising rate environment.
When you sell your home, the mortgage company would need to qualify the new buyer and approve them for an FHA loan. When the house sells and the loan closes, the buyer would assume the obligations of your FHA mortgage.
Another advantage of an assumable FHA loan that many do not know is that this arrangement avoids most closing costs on a new mortgage. Every time a new mortgage is issued, there are thousands in closing costs. Assuming a mortgage means most of these fees are avoided.
Assumability of an FHA house loan is especially valuable, experts say, for those who sell their home from three to seven years from when they bought it. Under three years, it is unlikely that rates will be much higher than now. After seven years, the benefits of an assumable loan are reduced because you have paid down more of the mortgage, and home appreciation also is a factor.
Still, being able to assume an FHA mortgage is a major advantage worth knowing when you are applying for a FHA home loan.
#5 You Can Have Foreclosures or Bankruptcy
One of the most persistent myths in the home buying and mortgage world is that you cannot buy a home for seven years after a foreclosure or bankruptcy. We wish that we could bury that myth once and for all, but it continues to rear its head every day!
Here’s the truth: If you have a foreclosure and/or a bankruptcy on your record, it is true that it will stay on your record for seven years, most likely. After seven years, it will drop off your credit report (if it does not, you should contact the credit bureaus and ensure that it does drop).
But there are many mortgage companies that will give you a home loan with these black marks on your record. In FHA’s case, you may get a loan in as little as one year after a bankruptcy or foreclosure. But two years is more common.
FHA will want to verify that your finances have recovered and you have the means to pay your mortgage. But it is certainly possible to get approved for a FHA loan with these black marks on your credit report.
#6 Streamline Refinance
FHA has a great feature called the FHA streamline. If the rates drop, you may have the option of doing a simple refinance into a lower rate. You cannot pull out cash, but you can get into a lower rate mortgage with a streamline refinance. There is no credit check or income verification, and you can even use your old appraisal.
As long as you have paid your long on time for at least the last six months, you may be eligible to do an FHA streamline refi and save big on your monthly payment.
#7 No Income Limits
FHA loans with their low rates and down payments are available to people with both low and high incomes. Some special loan programs out there have maximum income limits that means many working-class buyers are locked out. FHA loans are available for all income ranges.
#8 Gift Payments
Do you not have enough cash for your down payment? FHA allows you to get all of your down payment from the gift of a family member or friend. So, in theory, you could get into a home with no money down.
#9 Flexible Debt to Income Ratios
FHA has very flexible criteria for your debt to income ratio. They want as many people as possible with sufficient income to be able to buy a home. At this time, FHA wants to see a front-end ratio of 31%; this means that your payment for mortgage principal, interest, taxes and insurance should not exceed 31% of your gross monthly income.
For back end ratio, FHA wants to see 43%. This means the total sum of all of your monthly debt obligations should not exceed 43% of your gross income. FHA may allow you to have higher ratios if you have good credit or put more money down.
The Silver Lining
If you are considering buying a home this year, we suggest you apply for FHA loan. The U.S. Congress and the Department of Housing Development have come together to make sure that there are great deals in 2017. You should certainly submit a FHA loan application and check with your mortgage lender today to see if you can qualify.