As a prospective homeowner, you likely have basic knowledge about the mortgage options available to you. And one popular choice for many borrowers, no matter their homebuying experience, are loans insured by the Federal Housing Administration (FHA). But do you know all the intricacies and the options for this mortgage solution with lower down payment and credit score requirements? Before you ultimately decide to apply for one type of loan over another, find out if an FHA loan can work for you and your situation.
The History of FHA Loans
During the Great Depression in 1924, homeownership was at an all-time low. With a commonly required 50 percent down payment, buying a home was impossible for many Americans. At this time, the Federal Housing Administration, an agency under the jurisdiction of the U.S. Department of Housing and Development (HUD), created FHA loans to help low to moderate income families achieve homeownership. They required a significantly lower down payment for borrowers with lower credit scores and little savings. After these loans were implemented, homeownership rates steadily rose.
While the federal government doesn’t issue these loans, they do insure them, which means lenders are protected if the borrower defaults on their loan. This is why lenders can offer more relaxed terms to borrowers who don’t qualify for other types of mortgages.
FHA Loan Benefits
FHA loans are popular for first-time homebuyers because of their more flexible borrower requirements in comparison to conventional loans. If you’re having trouble obtaining financing through private lenders because of your financial situation, see if you could qualify for an FHA loan as an alternative solution.
Credit Score: While conventional loans require at least a 620 credit score, FHA loans allow a credit score as low as 500. However, if your credit score is between 500 and 579, you must pay a minimum 10 percent down payment.
Down Payment: If you don’t have a big supply of funds for a down payment, you may be able to benefit from an FHA loan. You can get a loan for as little as 3.5 percent down if your credit score is 580 or higher.
Debt: For FHA loans, your debt-to-income ratio (DTI) shouldn’t exceed more than 43 percent of your gross monthly income. You could also still qualify for an FHA loan even if you’d had a bankruptcy.
In addition, those who have an FHA loan may also be eligible for loan relief, which pauses or reduces mortgage payments when you experience a legitimate financial hardship, such as the loss of income or significantly raised living expenses.
Some things to note: The FHA limits how much you can borrow depending on where you’re buying and what kind of property you’re buying no matter the type of loan you’re applying for. Additionally, mortgage insurance premiums are required for all FHA loans, no matter how much you borrow. Ensure you speak with a qualified and knowledgeable lender to understand the specific details of your mortgage.
Types of FHA Loans
There are many kinds of FHA loans to choose from depending on your homebuying or homeownership needs. Whether you’re looking to buy, refinance or renovate, there’s an FHA loan for that.
Purchase
With a Basic Home Mortgage 203(b), you can buy a single-family home that must be your primary residence, not a vacation or second home.
Refinance
The FHA offers a couple different refinance loan options. With these, you can either refinance for a lower rate or shorter term, tap into your home equity to take out cash or roll renovation or home repair costs into your mortgage.
Renovation
If your home needs some tender loving care, you may want to consider an FHA renovation loan which can help you fund home improvements, including finishing your basement or upgrading your kitchen.
Energy-Efficient Mortgage
These mortgages help fund energy-saving home improvements but to qualify for this loan, your home needs to undergo an energy assessment.
Construction-to-Perm
This type of FHA loan helps the borrower pay for a home that is still being built by paying the contractor in installments. Once the home is completed, the loan turns into a permanent mortgage.
Learn What Loan Works for You
The home loan process can be long and tedious if you don’t know what you’re looking for and what is suitable for your needs. If you’re a first-time homebuyer or aren’t in the right financial standing for conventional loans, an FHA loan might work for you. Don’t be discouraged by the complexities of mortgage types, requirements and qualifications. Do your research and work with professionals who can give you the clarity you need to make one of the biggest financial decisions of your life.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
