The home buying market continues to roar and many consumers are excited to stop paying rent this year. One of the first steps is to apply for FHA home loan financing so let’s explore the opportunities. Here are some great reasons to call your mortgage lender today and apply for FHA loan programs:
#1 Your Credit Can Stink
That is putting it a bit harshly, but why beat around the bush? One of the biggest reason you should submit a FHA home loan application is that you can have bad credit. In fact, it is feasible this year to find an FHA loan with a terrible score of 500. It is not easy: Of course, even with a bad credit FHA mortgage, 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 approved FHA 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 600’s are more likely to be approved. HUD Approved 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, before applying for FHA loans with poor credit. Check today’s FHA credit score requirements.
#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 home loan – 100% house financing is available for some military veterans and active military borrowers that meet the VA eligibility requirements.
- The USDA loans – 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.
The low down-payment on FHA loan programs remains one of the most attractive features for new home buyers. The 3.5% down-payment required is very reasonable for the average borrower in 2020.
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 and USDA mortgages offer $0 down-financing today, but not everyone will qualify for those types of government-backed loans. With limited credit and no mortgage payment history, applying for a FHA mortgage is a safer bet.
#3 FHA Interest Rates Are Historically Low
In 2020 rates on FHA loans continue to hover in the low 4% range. 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. Yes, the rates rose in early 2020, but President Trump’s economic plans are beginning to show progress. If Obamacare remains unstable then this could be a positive sign for interest rate trends. These facts have introduced some economic uncertainty in the markets. On the plus side, it has kept the lid on mortgage rates. The current-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 to some degree, brokers and 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 600’s, 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 may be possible this year to still get an FHA loan rate in the 4% range according to Zillow reports, and this could be even lower than conventional interest rates. That is a great deal for a borrower with a sub-par credit score. FHA loan qualifications are more attainable than at any time of the last decade. Check for fixed and adjustable rates that are available on most FHA mortgage programs.
There are FHA loan lenders standing by, ready to help you qualify for a FHA loan that gets you into the home of your dreams.
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. Not all government finance programs offer such a wide variety of mortgage terms. The ARM’s ranging from one to seven years and the fixed amortized options offer the choice of a fifteen or thirty-year term.
#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.
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 2020, you should become familiar with both the well known and less well known benefits of the FHA loan program. One of the most underrated benefits of the FHA loan program that many people don’t know about is the fact it’s an assumable loan. Yes, it is a very unusual benefit of FHA financing 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 this year, 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! The assumable loan feature would make it easier in theory for you to sell your home in a rising rate environment.
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. Can you imagine if you took out a FHA loan at fixed 4% rate and three years later you went to sell your home and the competitive interest rate was 7%? In theory, this could provide you a serious asset when negotiating with the perspective house buyer. Most mortgage programs in today’s marketplace are not assumable, so the fact that FHA loans are assumable is a very significant benefit in the right situation.
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 assumable 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.
Having the ability to assume a 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 a FHA mortgage is a major advantage worth knowing when you are applying for a FHA home loan.
#5 You Can Have Foreclosures or Bankruptcy and still Qualify for FHA Loans
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 with FHA Loans If Rates Fall
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 refinance with a FHA streamline and save big on your monthly payment. Verify that you already have a mortgage insured by the Federal Housing Administration and then complete an application for a FHA streamline loan.
#7 No Income Limits on FHA Loans
FHA loan programs continue to be advertised 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. Unlike, the USDA program, FHA loans are available for all income ranges.
#8 Gift Payments OK with FHA Home Loans
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. It is very common to get help from family and friends when you a buy a home, and not all finance programs allow borrowers to use gift-funds as the source of a down-payment. This is another amazing benefit of buying a house with a FHA loan this year.
#9 Flexible Debt to Income Ratios on FHA Loans
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 underwriters have the discretion to to approve a FHA application even if you to have higher debt-to-income ratios. In most instances, the FHA underwriter will expect you to have good credit or require you to put more money down.
The Silver Lining with FHA Financing
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 this year. You should certainly submit a FHA loan application and check with your mortgage lender today to see if you can qualify.