Many barriers can stand in the way of obtaining a mortgage to finance a home purchase. Your credit score, debt-to-income ratio, and down payment amount can all prevent you from qualifying for a conventional mortgage. An FHA home loan has less stringent requirements that can reduce these barriers so that they can be overcome, putting homeownership within your reach.
The Federal Housing Administration is a government agency that has existed to help people with mortgages since the Great Depression during the 1930s. The FHA does not provide the funds for home loans directly. Rather, it approves certain mortgage lenders in Houston to give the loans to qualifying homeowners or buyers. It then ensures the mortgage product so that if the borrower defaults, the FHA will pay the remaining principal to the lender. Because of the reduced risk, the lender can then extend credit to borrowers who wouldn’t qualify otherwise. Here are some of the biggest benefits of taking out an FHA loan.
Read on for the benefits you have with FHA home loans as a first time home buyers Houston applicant.
1. You Get a Choice of Lenders With an FHA Home Loan
Because you do not borrow the money from the FHA itself, you can shop around among approved lenders and choose a mortgage with terms that are most agreeable to you. Approved lenders typically decide on their fees and interest rates, meaning that what one lender charges may be much lower than what another one charges.
2. You Can Qualify for an FHA-Backed Home Loan With a Lower Credit Score
To qualify for a conventional mortgage, you need a credit score of at least 620, but if you apply for an FHA loan, you may be able to qualify with a credit score as low as 500. A lower credit score means more requirements to meet, but a credit score on the low end still makes it possible for you to obtain an FHA loan when a conventional mortgage might be completely out of the question.
Maybe your credit history is blank because you have never had a credit account before. If that is the case, the federal government prohibits an FHA lender from denying your application for a government-backed home loan. Instead, you can use your payment history on things such as apartment rent and utility bills to establish a non-traditional credit history.
3. You Can Make a Smaller Down Payment With a Home Loan Backed by the FHA
With a conventional mortgage, you may have to make a down payment of 20% or more of the purchase price before you can qualify. With an FHA loan, you can make a much smaller down payment, although the exact amount you have to pay depends on your credit score. With a credit score between 500 and 579, you have to make a down payment of 10%, but if your credit score is higher than 580, you only have to pay 3.5% of the purchase price as a down payment.
If someone is willing to give you all the money you need for a down payment as a gift, the FHA will allow this. Nevertheless, the FHA has established a process for receiving these funds, which you will have to follow.
4. You May Get a Lower Interest Rate With an FHA Home Loan
When you take out a loan, such as a mortgage, the interest rate may be based partly on your credit score. In other words, lenders typically penalize borrowers with lower credit scores with higher interest rates because of the risk they are taking. FHA loans do not penalize you with higher interest rates for low credit scores.
Furthermore, even if your credit score is not an issue, FHA home loans typically charge lower interest rates than conventional mortgages. This can save you money every month over the life of the loan.
5. Your Seller Can Cover More of Your Closing Costs
Since sellers typically profit from the sale of their homes, it is customary for buyers to negotiate to cover a portion of the closing costs, which are administrative expenses related to the transaction. With a conventional mortgage, sellers can only pay up to 3% of the loan amount for closing costs, but this increases to 6% with an FHA loan.
FHA home loans are available to refinance an existing home as well as fund a new purchase. Rock Mortgage is an approved FHA lender. Find out more about the qualifications you must meet for an FHA home loan.
5 Significant Benefits of FHA Home Loans | Rock Mortgage — Houston, Texas