What is an FHA Loan?
FHA stands for the Federal Housing Administration, a Government agency created in 1934 by HUD, the U.S. Department of Housing and Urban Development to increase homeownership in America. The FHA insures loans offered by private lenders, and does not offer mortgage loans directly. Borrowers pay mortgage insurance (MIP), usually around 0.85 percent of the loan amount annually. In the event a borrower defaults on an FHA-insured loan the lender will be reimbursed by HUD thus reducing their risk allowing them to loosen their requirements.
Credit Score Requirements
Borrowers with a credit score between 500-579 required a minimum down payment of 10%. However, it is not likely mortgage lenders will approve you as a subprime borrower with a score below 580. If a borrower has a 580 credit score the minimum down payment is 3.5%. If your credit score is below 580, we highly recommend that you improve your credit score before applying.
FHA Loans Requirements
- 500-579 Credit score – 10% down payment
- 580+ Credit score – 3.5% down payment
- 43% maximum DTI ratio
- Mortgage insurance (MIP) is required
- Two years of employment history
- An appraisal must be done by an FHA-approved appraiser
- 2 year waiting period after a bankruptcy
- Steady employment and be able to prove income with recent tax returns, W2’s, and paycheck stubs
- Non-occupying co-borrowers allowed
- At least 18 years of age
- Student loan payments are factored into debt-to-income ratio
First Time Homebuyers
First-time home buyers love FHA loans because of the low credit and down payment requirements. In 2018 approximately 46% of first-time buyers used an FHA loan to buy their first home. But since they are only for owner-occupied residence, you cannot have two FHA loans open unless you must move for work or your family outgrows your current home.
First-Time Homebuyer Down Payment Assistance
FHA-insured mortgages allow you to use homebuyer programs.If you are a first-time homebuyer you may qualify for downpayment assistance or Government grants.You can search for your available state Government programs on the HUD website. For local county and city down payment assistance programs check out their websites for more information.
First-time homebuyers with bad credit
Since many first-time buyers have poor credit and don’t have a large down payment, FHA loans make a lot of sense. 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.
These loans are good for low to median income first time home buyers. FHA allows lenders more flexibility on debt-to-income ratios than traditional mortgages. Sometimes lenders can approve up to a 50% DTI ratio. Many low-income borrowers can get approved for a home loan through the FHA.
Who should get an FHA Mortgage?
FHA Loans are great for anyone that’s looking to purchase a home because they come with competitive mortgage rates and are easier to qualify for than traditional loans.
Candidates for FHA Loans
- Borrowers will a low credit rating
- Anyone that cannot afford a large down payment
- If you are receiving your down payment as a gift
- If your debt-to-income ratio is high
- First-time homebuyers
Down Payment Gifts
Another great benefit for FHA borrowers is that the down payment can be a gift.
The down payment 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 an 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.