If you want to buy a home but you don’t have 20% to put down, or perfect credit. No worries. FHA mortgages are the easiest type of loan to qualify for. But what are FHA Loans and who qualifies? In this article we’re going to teach you everything you need to know about FHA home loans.
What is an FHA Loan?
FHA stands for the Federal Housing Administration, a Government agency. The FHA was created in 1934 by HUD, The U.S. Department of Housing and Urban Development to increase homeownership in America.
The low credit score and down payment requirements allow more homebuyers to qualify for home loans. FHA Loans only require a 3.5 percent down payment with a 580 credit score. They are insured by the Borrowers are required to pay mortgage insurance (MIP) monthly, usually around 0.85 percent of the loan amount annually.
If a borrower defaults on an FHA mortgage, it is foreclosed on and HUD will pay the balance to the lender and take possession of the property. It is then listed as a HUD home on the hudhomestore.com website.
FHA Loan Infographic
FHA Credit Score Requirements
To qualify the borrower must have at least a 500 credit score for 90 percent LTV, or 10% down payment. However, it is not likely you will be approved as a subprime borrower with a score below 580.
If a borrower has a 580 credit score they will be required to have just a 3.5 percent down payment.
If your credit score is below 580 it is highly recommended that you improve your credit score before applying.
First-time Home buyers
Many people in America have heard of an FHA mortgage and believe it’s just for low income, or are “bad credit home loans”. However, this is not the case at all. These Government loans are the most popular type of home loan product used in the US.
Approximately 40% of all home loans in the U.S. are FHA. They are very popular for first-time home buyers because of their flexible qualifying guidelines and low down payments.
Low Income Buyers
These loans are good for low to median income first time home buyers as well. FHA allows lenders more flexibility on debt to income ratios than traditional mortgages. Many low income borrowers are able to get approved for a home loan through the FHA.
First-time homebuyers with bad credit
Since many first time buyers have poor credit, FHA loans make a lot of sense. A 500 credit score is needed for FHA with 10% down.
If you have a credit score of at least 580 you can qualify for FHA with just 3.5% down. Of course having a poor credit history means you will have a higher interest rate and your monthly payments will be higher as well.
For borrowers with scores in the 500-579 range, you should work on improving your credit scores before applying for a mortgage.
There are tips to increasing your score later on. Or you can skip to our article on how to improve your credit scores in 30 days.
Who should get an FHA Mortgage?
FHA Loans are great for anyone that’s looking to purchase a home. This is because the requirements and guidelines for FHA is much more linnet than traditional mortgages making them easier to qualify for.
Candidates for FHA Loans
Borrowers will a low credit rating Anyone that cannot afford a large downpayment If you are receiving your downpayment as a gift If your debt-to-income ratio is high First-time homebuyers
Down Payment Requirements
One of the greatest benefits of an FHA loan is the low 3.5% downpayment, which is much lower than other mortgage programs.
Typically, conventional mortgages require no less than a 5% downpayment and can be as high as 20%. As an example, if you’re buying a $200,000 house, a private loan will require no less than 5% down, or $10,000o, which is a best case scenario.
If you get an FHA loan your down payment will be 3.5%, which is $7,000 for a home costing $200,000.
Down Payment Gifts
Another great benefit for FHA borrowers is that the downpayment can be gifted to you. The downpayment of 3.5% can be a gift, as long as the person gifting the down payment meets FHA guidelines.
A relative, charity, your employer or workers union, even a friend can gift you the funds for your down payment as long as the friend has invested interest in the borrower.
This is a way that a FHA loan can provide the borrower 100% financing with no down payment out of pocket. You will need to fill out a gift letter for the mortgage down payment.