Nothing stunts a home loan application like a low credit rating or inability to make the minimum deposit. Instead of dedicating corporate hours towards a downpayment that you aren’t likely to afford any time soon, why not consider an FHA loan? This mortgage is ideal for prospective homeowners in poor financial health and provides government assistance.
What is an FHA Loan?
As compared to its conventional counterpart, which requires at least a 5% down payment, a credit score of 620 or higher, and debt-to-income (DTI) of 45%, the government-backed FHA loan is more forgiving of first-time homebuyers.
Guaranteed by the Federal Housing Administration, an FHA loan offers lender compensation if you end up defaulting. However, you won’t apply for your loan through the FHA itself—you’ll still have to link up with a regular mortgage lender.
An FHA loan requires only a 3.5% down payment, a credit score of 580 or higher, and a DTI of 50%. In some cases, you can apply with a credit score of as low as 500.
Qualifying for an FHA Loan
Being a “low-income” individual won’t automatically qualify you for an FHA loan. To be eligible, you must satisfy the following criteria:
- A 3.5% down payment with a credit score of at least 580—between 500 and 579, you’ll need to put down a down payment of 10%.
- You’re purchasing a single or multi-family home for up to four families. You can also buy a condominium or manufactured home.
- You must adhere to a borrowing capacity that will depend on the type of property you purchase. Consult the US Department of Housing and Urban Development website for state and county information regarding borrowing limits.
- You do not intend to purchase a property with significant structural or safety issues.
The Different Types of FHA Loans
FHA loans come in various shapes and sizes that include the following.
- Traditional. This mortgage pertains to a primary residence for a single or multi-family home and is available at a fixed or adjustable rate.
- Home Equity Conversion or Reverse Mortgage. This loan is available for older homebuyers who want to tap into equity as cash.
- Construction to Permanent. This loan is specifically for homebuilders.
- 203(K) Rehab. This mortgage allows for home improvements and additional funds.
- Energy Efficient Mortgage (EMM). This mortgage allows you to roll the costs of eco-repairs to appliances and fixtures such as furnaces and insulation without adding to your deposit.
The Advantages of an FHA Loan
The primary advantage of an FHA loan is its lenient borrowing demands. As compared to conventional loan stipulations, the credit and debt requirements of FHA loans are incredibly forgiving. There are no income limits and you do not have to be a first time homebuyer.
What You Should Look Out For
FHA has a mortgage insurance premium that can come up to 1.75% of your loan upon closing. This also comes with a monthly payment of 0.45% to 0.85% of your loan cost.
Some home buyers won’t save up enough to make a 3.5% deposit. If you’re part of this statistic, you may need to consider a USDA (very good for rural areas and has income limits) or a VA loan (available only to members of the military community).
FHA will also restrict you from borrowing under a certain amount, and if your chosen property poses severe safety risks.
FHA Loans with Steelman Mortgages in Roseville
Though an FHA loan demonstrates fairly evident benefits, it doesn’t always complement low-income borrowers. Always discuss with a lender what your best options are—whether that be to consider an FHA loan or otherwise. If you’re a first-time homebuyer in Roseville, consult with our experts at Steelman Mortgages to determine how you can best finance your purchase. Call (916) 847-7263 for a free home purchase qualifier and to kick-start your application.
