Many Americans are feeling optimistic about the economy for 2017 and are planning to apply for an FHA mortgage. The economic signs are pointing to strong economic growth, as the stock market is booming and the Federal Reserve is contemplating as many as three rate hikes next year.
One of the very best home loan options for millions of home owners is the FHA mortgage loans that are run by the Federal Housing Administration. The FHA insures home loans that are provided by thousands of mortgage brokers, bankers and lenders across America. As a result, FHA-approved lenders offer many low interest home financing options with low down payment requirements.
There are many FHA-approved lenders in all US states that have different criteria for granting loans. FHA sets certain rules, but the different lenders have the flexibility to set up their own criteria under those guidelines.
Which FHA mortgage program that is best for you depends upon your financial situation, credit score and how expensive the home is you are applying for.
Which FHA-approved lender is ‘best’ is hard to say as there are thousands of them. The best way to find a good one is to simply shop around with FHA-approved lenders in your area.
Below are some of the criteria for being accepted for an FHA home loan.
#1 Lower Credit Score Requirements
After the mortgage crash, it was hard to get any type of mortgage loan without stellar credit above 740. Today, FHA requirements for credit scores are much lower – lower than for conventional loans, in fact.
Did you know that you may be able to qualify for an FHA mortgage with a 580 credit score? You can. You may need to shop many different lenders to find one that will approve you, but it certainly is possible. Generally it is difficult to get a conventional mortgage with a credit score of 620.
- Flexible Credit Standards on FHA Mortgages
- DE Underwriters Consider Compensating Factors Beyond Credit Scores
#2 Closing Cost Help
Current FHA policy allows sellers to pay as much as 6% of your closing costs. This is a huge benefit for FHA borrowers because many of them don’t have much left after they safe for the down payment.
#3 FHA Loan Can Be Assumed
An FHA mortgage is assumable. This just means that if you want to sell your home, a qualified buyer can take over your FHA loan at your current rate.
This is a big advantage when you are in a rising interest rate market. Many buyers will be shopping for a mortgage in a rising interest rate environment where the going rate could be one full point or more above your rate. FHA mortgages are one of the only products on the planet that allow borrowers to assume a loan.
#4 Down Payments as Low as 3.5%
Without a doubt, one of the biggest attractions of FHA mortgages is that you need as little as 3.5% down to buy a home. Some lenders may require you to put down more than that, but if you hunt around, you may need to put down as little as 3.5%, which is $7500 for a $200,000 home.
- Affordable Home Buying with Low Down-Payments
- Some States Allow Down-Payment Assistance
#5 Flexible Debt to Income Ratios
Because FHA is guaranteeing the loan from default, mortgage lenders are able to offer more flexible lending criteria to home-buyers. For example, an FHA mortgage company can allow your debt to income ratio to be up to 31%. This means that your total loan payment is divided by your gross monthly income.
Some lenders might allow this number to be even higher, if you have a larger down payment or a good credit score.
Also, the ratio of your total debt to income, including your mortgage and all credit payments each month, can be up to 43%. This flexibility can be very attractive for people who have lost a job, or possibly have had their hours cut.
#6 Chapter 7 and Foreclosures Can Be Ok
If your foreclosure or bankruptcy was more than 2 year ago, many FHA lenders will overlook it. So it may be realistic to refinance out of a bad credit mortgage in an effort to get better terms and a lower interest rate.
If you are thinking about FHA mortgages, also keep these myths in mind:
You can’t buy a condo with an FHA mortgage – not true. FHA does require the condo complex to be approved by FHA, but there are many of them across the US.
FHA loans are always more costly – not always. You do have to pay mortgage insurance: an upfront payment that can be added to the loan, and also a monthly premium that usually amounts to $100-$150 per month. But remember that you are paying a lower rate than most conventional loans. The mortgage insurance also is tax deductible.
FHA borrowers have bad credit – not always. The typical borrower has a credit score of 680 or so.
Something to Think About
There are thousands of good, FHA-approved lenders in the United States. Even with a credit score in the low 600s, you should be able to usually find a lender who will work with you most of the time.
We usually recommend FHA mortgages to people who want to put down less than 20%. The interest rate is usually lower than conventional rates, and putting down less money allows you to have more money available for renovating the home or other important things.
As far as which lender to use, you just need to talk to a mortgage broker, bank or credit union to see what types of specific FHA programs they offer.
Some of them may offer more flexible criteria than others. Which one is best for you will depend. But generally, the FHA mortgage loan is a great fit for millions of borrowers.
What You Need to Know About FHA Mortgage Loans
If the home you are considering is within the FHA conforming limits, getting an FHA mortgage is a good idea for many people. After the subprime market crash, millions of people had damaged credit. They could no longer buy a home and may have had to rent for many years.
Fortunately, the FHA mortgage program is available today and can help people with average or bad credit to buy their own home.
To qualify for a conventional loan, you normally need at least a 680 credit score today. An FHA loan is much more forgiving. Borrowers may be able to qualify with a credit score of 580 and still pay only a 3.5% down payment.
This is quite an amazing thing; people who have a 580 credit score often have had foreclosures or a bankruptcy. Still, they may be able to qualify for an FHA home mortgage. It is true that you have to wait at least a year and possibly two after foreclosure or a bankruptcy to get an FHA loan. But you still can get an FHA mortgage loan with a very low credit score.
Being able to put only 3.5% down also is a major help to people who are recovering from the financial crisis. Many conventional loans require you to put down 10-20%.
If you have a credit score that is below 600, you will need to search more to find an FHA approved lender who will work with you. Some FHA mortgage lenders will have what are called ‘overlays’ that set up higher requirements than the ones that FHA itself has.
If your credit score is in the 620 to 640 range, you should be able to find quite a few lenders who will work with you.
Another great thing about FHA mortgages is that the seller can pay part of your closing costs. Some sellers may be strongly motivated to sell and will be willing to pay some closing costs to get the house sold. It will certainly help you to have someone else pay the closing costs on your home!
Last, FHA mortgage loans are assumable. This means that if you have an FHA loan on your home and sell it, the new buyer can assume the loan at your interest rate. This can make it easier to get the house sold; the new buyer must qualify for the loan, but this can really be a big help, especially in a rising interest rate market.
FHA mortgage limits change every year, so you should check for you area what the current loan limit is, so you know how to shop for a home.