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Low down payment - Income consideration - low to moderate credit
What is an FHA Loan?
An FHA loan is a mortgage that’s insured by the Federal Housing Administration
(FHA). They are popular especially among first time home buyers because they
allow down payments of 3.5% for credit scores of 580+. However, borrowers must
pay mortgage insurance premiums, which protects the lender if a borrower defaults.
Borrowers can qualify for an FHA loan with a down payment as little as 3.5% for a
credit score of 580 or higher. The borrower’s credit score can be between 500 – 579
if a 10% down payment is made. It’s important to remember though, that the lower
the credit score, the higher the interest borrowers will receive.
The FHA program was created in response to the rash of foreclosures and defaults
that happened in 1930s; to provide mortgage lenders with adequate insurance; and
to help stimulate the housing market by making loans accessible and affordable for
people with less than stellar credit or a low down payment. Essentially, the federal
government insures loans for FHA-approved lenders in order to reduce their risk of
loss if a borrower defaults on their mortgage payments.
FHA Loan Requirements
For borrowers interested in buying a home with an FHA loan with the low down
payment amount of 3.5%, applicants must have a minimum FICO score of 580 to
qualify. However, having a credit score that’s lower than 580 doesn’t necessarily
exclude you from FHA loan eligibility. You just need to have a minimum down
payment of 10%.
The credit score and down payment amounts are just two of the requirements of
FHA loans. Here’s a complete list of FHA loan requirements, which are set by the
Federal Housing Authority:
Borrowers must have a steady employment history or worked for the same
employer for the past two years.
Borrowers must have a valid Social Security number, lawful residency in the U.S.
and be of legal age to sign a mortgage in your state.
Borrowers must pay a minimum down payment of 3.5 percent. The money can be
gifted by a family member.
New FHA loans are only available for primary residence occupancy.
Borrowers must have a property appraisal from a FHA-approved appraiser.
Borrowers’ front-end ratio (mortgage payment plus HOA fees, property taxes,
mortgage insurance, homeowners insurance) needs to be less than 31 percent of
their gross income, typically. You may be able to get approved with as high a
percentage as 40 percent. Your lender will be required to provide justification as to
why they believe the mortgage presents an acceptable risk. The lender must include
any compensating factors used for loan approval.
Borrowers’ back-end ratio (mortgage plus all your monthly debt, i.e., credit card
payment, car payment, student loans, etc.) needs to be less than 43 percent of their
gross income, typically. You may be able to get approved with as high a percentage
as 50 percent. Your lender will be required to provide justification as to why they
believe the mortgage presents an acceptable risk. The lender must include any
compensating factors used for loan approval.
Borrowers must have a minimum credit score of 580 for maximum financing with a
minimum down payment of 3.5 percent.
Borrowers must have a minimum credit score of 500-579 for maximum LTV of 90
percent with a minimum down payment of 10 percent. FHA-qualified lenders will use
a case-by-case basis to determine an applicants’ credit worthiness.
Typically borrowers must be two years out of bankruptcy and have re-established
good credit. Exceptions can be made if you are out of bankruptcy for more than one
year if there were extenuating circumstances beyond your control that caused the
bankruptcy and you’ve managed your money in a responsible manner.
Typically borrowers must be three years out of foreclosure and have re-
established good credit. Exceptions can be made if there were extenuating
circumstances and you’ve improved your credit. If you were unable to sell your home
because you had to move to a new area, this does not qualify as an exception to the
three-year foreclosure guideline.
The property must meet certain minimum standards at appraisal. If the home you
are purchasing does not meet these standards and a seller will not agree to the
required repairs, your only option is to pay for the required repairs at closing (to be
held in escrow until the repairs are complete).
See today’s rates for FHA loans on Zillow Arrow
Benefits of FHA Loans: Low Down Payments and Less Strict Credit Score
Typically an FHA loan is one of the easiest types of mortgage loans to qualify for
because it requires a low down payment and you can have less-than-perfect credit.
For FHA loans, down payment of 3.5 percent is required for maximum financing.
Borrowers with credit scores as low as 500 can qualify for an FHA loan.
Borrowers who cannot afford a 20 percent down payment, have a lower credit score,
or can’t get approved for private mortgage insurance should look into whether an
FHA loan is the best option for their personal scenario.
Another advantage of an FHA loan it is an assumable mortgage which means if you
want to sell your home, the buyer can “assume” the loan you have. People who have
low or bad credit, have undergone a bankruptcy or have been foreclosed upon may
be able to still qualify for an FHA loan.
Mortgage Insurance is Required for an FHA Loan
You knew there had to be a catch, and here it is: Because an FHA loan does not
have the strict standards of a conventional loan, it requires two kinds of mortgage
insurance premiums: one is paid in full upfront -– or, it can be financed into the
mortgage –- and the other is a monthly payment. Also, FHA loans require that the
house meet certain conditions and must be appraised by an FHA-approved
Upfront mortgage insurance premium (UFMIP) — Appropriately named, this is a
one-time upfront monthly premium payment, which means borrowers will pay a
premium of 1.75% of the home loan, regardless of their credit score. Example:
$300,000 loan x 1.75% = $5,250. This sum can be paid upfront at closing as part of
the settlement charges or can be rolled into the mortgage.
Annual MIP (charged monthly) — Called an annual premium, this is actually a
monthly charge that will be figured into your mortgage payment. The amount of the
mortgage insurance premium is a percentage of the loan amount, based on the
borrower’s loan-to-value (LTV) ratio, loan size, and length of loan: