Not being able to save for a down payment or having bad credit doesn’t automatically prevent you from being able to obtain a mortgage and buy a home. Even if you can’t qualify for a traditional mortgage, you can still apply for an FHA loan.
Important Facts About FHA Loans
FHA loans are a viable option for borrowers who have difficulty meeting conventional loan requirements. These loans offer extra assurance for lenders because they’re backed by the Federal Housing Association. For many borrowers, they’re a great option because they make it easier to qualify. And, because the down payment is lower, they can free up funds for other expenses like home repairs.
That being said, everyone’s financial situation is different. Here are some important facts you should know before you apply for an FHA loan.
- FHA loan requirements are more relaxed. For a conventional loan, borrowers need to have a low debt-to-income ratio and a credit score of at least 620. For FHA loans, the minimum credit score requirement is only 500. Borrowers with a credit score of 580 or higher only have to put down 3.5%. Furthermore, debt-to-income ratios can be as high as 50% with an FHA loan.
- You’ll have to pay for mortgage insurance. Mortgage insurance is required for FHA loans that have a down payment of 10% or less. Mortgage insurance for FHA loans usually runs between 0.45% and 1.05% of the loan amount and is required for the entire duration of the loan.
- Terms vary from one lender to the next. The Federal Housing Association sets requirements for FHA loans. But lenders are also allowed to impose their own requirements. This means that some lenders may require a higher credit score or down payment.
- Your house will have to meet the FHA’s minimum property requirements. The FHA will only issue a loan for a house that meets its minimum property standards. If you’re thinking about buying a fixer-upper, an FHA loan may not be your best option, but it all depends on the home.
- The house will need to be your primary residence. For the most part, the FHA only issues loans to borrowers who intend to occupy the home as their primary residence. You must move in within 60 days of closing and live in the home for at least one year.
Speak to an Expert
Not sure if an FHA loan is the right option for you? Speak to an expert to discuss your options or apply for an FHA loan today.