FHA loans have been around for a long time and have had many changes along the way. Because of that, many people have misconceptions regarding the program. Whether they think they have to be first-time homebuyers or that they cannot ever refinance out of the program, these misconceptions are keeping many people from taking advantage of a great program that offers low rates and great terms. Let’s take a look at some of the myths and what the real truths behind them are so you can be properly informed.
Myth: You must be a first-time homebuyer.
This is perhaps, the largest myth. Yes, the FHA loan used to be a popular program strictly for first-time homebuyers, but today, there are people of all ages and with all types of housing history that use the program. Who it is really meant for is the people with average credit and little money to put down. This could be people that already owned a house but unfortunately suffered a bankruptcy or foreclosure and are now trying to start over. It also includes people that have never had financial troubles, but simply want to put down 3.5 percent and get a loan despite their mediocre credit. As long as you meet the minimum requirements of having a credit score over 580 (for the 3.5% down payment); have on-time payments for the last 12 months; have the 3.5% to put down; and have a debt ratio lower than 43%, you have a good chance at qualifying.
Myth: You must purchase a single-family home for an FHA loan.
This again is another non-truth. You do not have to purchase a single family home. You have to purchase a one unit property in most cases, but that includes condos and town homes. If you choose to use FHA financing for a multiple unit property, you simply have to prove that you will occupy one of those units. This is because FHA loans are strictly for owner occupied properties. If you can show that you will live in one of the 2, 3, or 4 unit properties you purchase, then FHA financing could be an option.
Myth: If you do not have enough credit you cannot get an FHA loan.
This truth depends on the lender you use, as each lender can create their own rules in addition to following the rules the FHA sets, but most lenders will use non-traditional credit to qualify you for a loan if you do not have enough credit to qualify. This does not mean that you can use non-traditional credit lines instead of your BAD credit. It means that if you do not have enough trade lines reporting to give you a credit score, the lender can opt to use things like utility payments, rent payments, and insurance payments that were made on time in order to qualify you for the loan.
Myth: You declared bankruptcy so now you are not eligible for the FHA program.
This is another answer that has changed through the years. It used to be that you would have to wait many years to get an FHA loan after a bankruptcy – typically 7 years. Today, however, you can wait as little as 2 years for a standard bankruptcy and even less time (12 months) if you have extenuating circumstances. It comes down to proving that you have bounced back from the occurrence and reestablished yourself with good credit. Lenders need to see that you have made your payments on time since the bankruptcy discharge and that you have been able to establish new, positive credit lines. In the case of extenuating circumstances, if you lost your job or had a sudden injury/illness that kept you from making money, you might be able to waive that 2nd year of waiting and get an FHA loan after just 12 months.
Myth: Everyone can put down just 3.5 percent.
Most people that apply for an FHA loan will be able to take advantage of the low down payment requirement of just 3.5 percent of the sales price, but not everyone will be able to do this. If your credit score is between 500 and 579, you will be required to put down 10 percent of the sales price of the home. This is because the lower your credit score is, the more risk you give the lender. They make up for that risk by asking you to have a higher investment in the property. With more invested, you are more likely to do whatever it takes to make your payments and keep your home.
Myth: You can use FHA loans on any condo.
The truth is that yes, you can finance a condo with an FHA loan, but not every condo. The condo association must go through an approval process first. If they do not get approved by the FHA, then no one can use FHA financing to purchase a unit in that association. Getting approved is not difficult and as long as the association meets standard requirements like having most of the units purchased and owner occupied and having a majority of the owners making their association dues payments on time, then they can get approved. Because condos are a bit riskier than single family homes, lenders have to make sure there are reputable associations running them to keep them on the up and up.
Myth: You need to make a lot of money to qualify.
The truth is for any loan, you do not need to make A LOT of money. What you need to make is enough to cover the mortgage you intend to take on in addition to the other monthly obligations you have and still have money left over. Every program has a maximum debt ratio they are willing to allow; the FHA allows a back end ratio of 43%. This means that your total monthly debt starting with your principal, interest, taxes, and insurance (homeowners and mortgage insurance) must be less than 43 percent of your gross monthly income. How much you make depends on the price of your intended home purchase along with your existing debt.
As you can see, FHA loans are a great way to get a home because they offer you the ability to put little money down and they also have flexible guidelines, especially when it comes to extenuating circumstances that made you suffer negative financial consequences. In order to take full advantage of the program, you should do your research and shop around with various lenders to see which lender offers the lowest rate and best terms for your qualifying factors.