Federal Housing Administration (FHA) loans help homebuyers afford to buy a home by offering lower barriers of entry. The federal government insures the loans, making it easier for homebuyers to get approved since this lowers the lender’s risk. FHA loans are particularly popular among first-time homeowners because of the favorable credit and down payment standards. For those who don’t have perfect credit or a lot of cash on hand for a down payment, FHA loans can serve as an ideal solution.
The Perks of FHA loans
FHA loans allow those with an imperfect credit history to obtain a home, as long as you meet certain conditions. While FHA loans allow for lower credit scores than other mortgage programs, lenders might have additional credit score requirements depending on the risk they are willing to take. You can learn about the minimum credit score you need to have by checking with your lender.
If your FICO score is 580 or higher, then you’re required to make a down payment of just 3.5% of the loan. Therefore, we recommend checking your credit score before applying for an FHA loan to see where you stand. There are numerous steps you can take to raise your credit score if it falls below the qualifying standards. Also consider that the lower your credit score and down payment, the higher your interest rate.
Sounds great! What’s the catch?
Of course a plum deal like an FHA loan doesn’t come for free. Because the government insures your loan against default, you must pay insurance premiums to offset the lender’s risk. You pay for the insurance in two installments. First, you pay an upfront premium amounting to 1.75% of the loan. This amounts to $1,750 for a loan of $100,000. However, you can finance this cost into the total loan amount. The second insurance payment is paid monthly, much like health or car insurance. This amount varies depending on the loan term and the down payment amount. For example, a 15-year loan with a payment of 10% or less would cost 0.70% of the loan.
How do I qualify?
Besides having the required credit score and down payment available, there are a few other requirements you must meet to receive an FHA loan. First off, you must have a steady employment history or have worked for the same employer for at least the past two years. Your front-end costs, including mortgage payment, property taxes, insurance, and fees, should not exceed 31% of your income. However, you may be able to get approved with a percentage as high as 40%. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. Your lender will need to include any compensating factors used for loan approval.
When combined with your mortgage, your other debt (such as credit cards, car payments, etc.) should not exceed 43% of your income. However, you may be able to get approved with a percentage as high as 50%. In this case, your lender will also need to justify their decision and present any compensating factors used for loan approval. You also must possess a valid social security number and be of legal age to sign a mortgage in your state. New FHA loans are only approved for primary residence occupancy, so you cannot use the loan to fund a second or rental home.
FHA loans from Vantage West
Vantage West has a dedicated team ready to serve your FHA and other home loan needs so you can focus on the important things, like which child gets the room with the bigger closet and who gets to decide on the color of paint in the activity room.
Loans subject to approval. Certain restrictions may apply. Mortgage options subject to change.