You’ve probably heard that the FHA loan is for first-time homebuyers only. That’s a myth. While it used to be a popular loan for first-time homebuyers, it’s really for anyone that needs the help of the flexible guidelines that they offer.
Many borrowers that can’t qualify for a conventional loan turn to the FHA program. The FHA program has lower credit standards and more flexible debt ratio guidelines. They also allow a lower down payment than conventional programs allow. So who benefits the most? Keep reading to find out.
Even though it’s not a first-time homebuyer’s program, the FHA loan is good for those who haven’t owned a home before. It’s not only the flexible guidelines that help, but the low down payment requirements. The FHA loan only requires a 3.5% down payment. Conventional loans require at least 5% down to qualify. Even though 1.5% doesn’t seem like a lot, if you think of a $200,000 home, that’s a $3,000 difference.
Borrowers With High Debt Ratios
Your debt ratios are something any lender with any loan program is going to look at to determine if you qualify. Conventional loans require rather low ratios. On the housing end, they allow a 28% ratio. This means that your housing payment can only take up 28% of your gross monthly income. They also only allow a 36% debt ratio for all of your debts.
FHA loans, on the other hand, allow a 31% housing ratio and a 41% total debt ratio. They sometimes even go as high as a 43% debt ratio. That can give you a lot more wiggle room when it comes to your debts. The conventional loan could restrict how much you could borrow if your debt ratios are tight, whereas the FHA loan will allow you to borrow more without going over the guidelines.
Borrowers With Low Credit Scores
Another major factor in your ability to secure a mortgage is your credit score. Again, conventional loans have stricter guidelines. They require at least a 680 credit score, in many cases. FHA loans are on the complete opposite side of that spectrum. They require only a 580 credit score. In fact, you may even qualify with a credit score as low as 500, but you’ll need a 10% down payment if you do qualify.
The lower credit score requirements make it easier to qualify even if you’ve had some credit mishaps in the past. The FHA is more forgiving than conventional loans, making it easier to qualify even if you’ve had a bankruptcy, foreclosure, or other unfortunate financial events.
Borrowers That Lost Their Home in Foreclosure
You probably think that if you suffered a foreclosure that you won’t get a mortgage ever again. Enter the FHA loan. Yes, you have to wait three years before you can apply, but you don’t have to worry about having great credit, low debt ratios, or a lot of money to put down on the home.
The FHA loan offers the flexible guidelines that you may need as you pick up the pieces. While three years is a long time to get things going again, you aren’t going to reach perfection. You’ll need time to get back to conventional loan guidelines. While you wait for that to happen, you can enjoy the benefits of the FHA loan.
Understanding the FHA Loan
Before you jump in and take the FHA loan, you’ll need to know one thing about it. You must pay mortgage insurance for the life of the loan. In fact, you’ll pay it twice. You pay it once at the onset of the loan, at the closing. This is the upfront mortgage insurance. You’ll pay it again monthly, as annual mortgage insurance. Your lender will charge you the insurance on a monthly basis by dividing up the annual premium by 12 months.
You will pay the mortgage insurance for the entire time that you have the loan. Unlike conventional loans, which cancel, your insurance once you owe less than 80% of the home’s value, FHA mortgage insurance never goes away.
The FHA loan is beneficial for many people. If you do need to use it and then find yourself in a better financial position, you can always refinance out of it. In the meantime, it can help you get into a home when no other loan program may offer that opportunity.