If you can afford a monthly mortgage payment but you’re struggling to save enough cash for the down payment you need in order to qualify for a conventional mortgage, you may want to consider getting an FHA loan instead.
Insured by the Federal Housing Administration, FHA loans are intended to help borrowers with low-to-moderate income and/or lower credit scores purchase a home. Even though an applicant needs to comply with specific income, employment, credit score, down payment, DTI ratio, and occupancy requirements in order to qualify for an FHA-insured mortgage, this loan brings along a series of benefits that every house-hunter should be aware of when looking for home financing options. Here are the key benefits of these loans.
- Lower credit score and down payment requirements – Getting a conventional mortgage with a FICO score below 620 can be difficult these days. That’s because most conventional lenders don’t issue loans to borrowers with scores lower than 620. The good news is that an applicant with a FICO score between 580 and 620 may be eligible for an FHA loan if he or she can put down 3.5% or more on a home. A FICO score between 500 and 579 will require a down payment of at least 10%.
Considering that the down payments and credit scores, which are usually required in order to qualify for a conventional home loan, are the largest obstacles to homeownership, FHA’s minimum down payment and credit score requirements can help more people to purchase a home that they couldn’t otherwise afford.
- More flexible income requirements – FHA loans don’t have any minimum income requirements. This means that you could qualify for an FHA-insured mortgage as long as you have a steady income and proof of employment. However, the FHA loan amount you could get is limited by the debt-to-income (DTI) ratio, which shouldn’t exceed 43% of your gross monthly income.
To calculate your DTI ratio, you need to add up your debt payments (e.g. car loans, student loans, personal loans, credit card payments, medical bills, and other debts) and recurring expenses (e.g. legally binding payments, such as rent and child support; living expenses, like utilities and groceries, are not included). Then, divide the total by your gross monthly income and multiply the result by 100 to get a percentage. For example, if your gross monthly income is $6,500, and you need $2,750 to cover your monthly debts and recurring expenses, your DTI ratio would be 42.3% (2,750: 6,500 x 100 = 42.3). Although lenders generally seek lower ratios, you could still get an FHA loan even if your DTI ratio is right below the acceptable threshold.
- More flexible underwriting standards – Regardless of whether an applicant has a lower credit score, misused credit, and/or filed for bankruptcy, he or she will be treated more leniently when applying for an FHA loan, particularly if good payment patterns have been reestablished. Additionally, the applicants who have previously filed for Chapter 7 or 11 bankruptcy must wait 2 years to get an FHA loan instead of 4 years, which is the typical waiting period for conventional mortgages, and only 1 year instead of 2 years after Chapter 13 bankruptcy.
- FHA loans are assumable – When buying a home that’s subject to an existing FHA loan, the homebuyer can choose to take over the loan instead of getting a new mortgage. Not only may an existing FHA loan carry a lower interest rate than a new mortgage; assuming the loan could also save you thousands of dollars in closing costs and interest payments.
- A more streamlined refinance process – Because an FHA refinance doesn’t involve income verification, applicants aren’t required to submit tax returns, pay stubs, proof of employment, or other documents to verify income and assets. As well, an FHA refinance doesn’t require a minimum credit score and home appraisal.
How You Can Get an FHA Loan
Before shopping around for an FHA-insured mortgage, an important thing to know is that these loans are restricted to the buyers who intend to use their homes as primary residences. This means that FHA loans cannot be used to purchase a vacation home or an investment property.
The easiest way to get an FHA loan is to look for a mortgage broker that has plenty of expertise in FHA financing and provides FHA loans from different lending sources. Opting for an experienced mortgage broker saves you from the hassle of applying for an FHA loan with different lenders, which could be more time-consuming and costly due to application fees. Since the first step to buying a home is finding the right lender and financing option, our experts are ready to offer all the information and guidance you need in order to successfully start and end your home-buying journey!
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