Many homebuyers fear there is no way to get a decent home without a20% down payment and a glowing credit historyHowever, This isn’t always true. For years, homebuyers have leveraged the FHA loan program to purchase homes with minimal cash down payments. With a moderate credit score, Applicants can qualify for an FHA insured loan with only a 3.5% down payment.
The FHA loan is a federally backed loan that dates back to the Great Depression. During this time of rising defaults and foreclosures, It was implemented to both provide lenders with insurance as well as help lower income Americans borrow money to purchase homes they otherwise would be unable to afford. To this day, the FHA loan is incredibly popular because it offers an increasingly cash poor purchasing community an alternative to renting, but lowering the upfront costs does not always save homeowners money over time.
If you’re thinking about applying for an FHA loan, it’s important to first understand the benefits and restrictions of these loans before signing on the dotted line.
Low Down Payments
Where traditional loans require an upfront down payment of 20% of the value of the loan, FHA loans offer down payment options as low as 3.5% of the loan value. With less upfront costs, homebuyers eliminate the time necessary to save as much as $20,000 or more and move into their home faster, spreading out more of the costs over the term of the loan.
Lenient Credit Requirements
FHA loan credit score requirements aren’t as high as conventional loans. Lenders consider FHA applicants with a credit score as low as 580, and. Most lenders can offer options on scores lower the 580 if the applicant is willing to make a larger down payment.
With FHA loans, borrowers who have no credit history can sometimes use non-traditional forms of credit to qualify such as utilities, cell phone bills, or insurance payments.
Speak with a Residential Mortgage Loan Originator (RMLO)to determine what your application will require.
Debt to IncomeRatios
Lending institutions keep a close eye on how much monthly debt borrowers have(monthly debt obligations) divided by their monthly paycheck or earnings(your gross monthly income). This is known as your debt-to-income ratio.
(Debt ÷ Income) x 100 = DTI %
FHA has a higher threshold for DTI ratios and can allow as high as 56.99 percent DTI.
With conventional loans, borrowers typically must have a 45 percent DTI ratio or less. With a DTIhigher than 45%,it’s unlikely a bank will approve a conventional loan application.
FHA loans are one of the few loan products that allow a potential buyer to pick up the loan right where the previous owner left off with the same interest rate. This is a benefit when new loan interest rates are higher than when the seller purchased the home. This also saves money for both the buyer and seller by eliminating traditional closing costs.
Closing Cost Assistance
Depending on your credit score, interest rate, and purchasing price, an experienced lender will be able to provide [JL1]
Any potential house purchased with an FHA loan must be in good condition to meet the strict appraisal standards set by the FHA.
If you’re considering a fixer-upper, this may not be for you.
Mortgage Insurance (PMI)
Lenders take on more risk to offer FHA loans, mortgage insurers require both an upfront premium (1.75% of the loan amount) and an ongoing monthly premium for the length of the loan term.
Unlike conventional private mortgage insurance, which can be terminated once you’ve reached 20% of the equity in your home, the FHA mortgage insurance premium will remain for the life of the loan.
Note: paying an initial down payment of 10% or refinancing later down the road are two alternative options to paying PMI costs.
There are caps to the amount that can be borrowed for an FHA loan. In Houston, the maximum price limit is around $331,200. Borrowers should check with a RMLO to determine if their loan amount is within local FHA loan limits.
Despite the drawbacks, the FHA loan is a great way to get into a new home with minimum cash down and a low credit score. However, FHA borrowers must be prepared to pay for a monthly mortgage insurance premium and calculate the cost to refinance down the road. Before making any decisions, Speak with an experienced loan officer to discuss the ins and outs of the FHA loan product for your specific situation.
We’re here to help. Call Rock Mortgage today at 832-230-3067 or begin the process directly on our site. We’ll be in touch soon and look forward to working with you!