FHA loans have been aiding individuals in homeownership since 1934. The Federal Housing Administration will insure the loan, and the borrower will pay for mortgage insurance. This protects the lender from any loss if the borrower defaults on the loan and enables the lender to offer a better deal. FHA allows a buyer to purchase a property with 3.5% down and are more lenient on areas such as credit and funds to close
Most loan types use credit scoring in the underwriting process and lenders believe in a direct relationship between low credit scores and higher mortgage delinquency rates. Because of this, most lenders have established minimum credit scores at which they’ll accept loans. A lack of credit, old delinquencies or incorrect information on the credit report can cause a low credit score. Unlike these lenders, FHA does not have specific credit score requirements and although a high credit score will still assist in getting the mortgage approved, a low score is not automatically cause for denial. If you have a low credit score, you can still demonstrate your ability and willingness to pay the loan back. You will have an opportunity to explain the circumstances surrounding the credit difficulties and have that explanation considered in the underwriting process.
The underwriter of an FHA loan will review the credit and payment history of a borrower over the past 2 years. With a good repayment history, a borrower will often be approved for a mortgage even when Conventional financing has turned them down. If you speak with an experienced loan officer they will help you plead your case and make suggestions as to how you can make your application more appealing to the FHA. Because of the FHA’s leniency, some borrowers with past credit problems elect to use FHA for loans when they have a substantial down payment instead of getting a higher interest rate conventional loan.
With an FHA mortgage, the borrower must put down at least 3.5% of the property price but some of this money may be used for down payment and the rest for closing costs. Despite this, the total cost to close on an FHA is commonly over the 3.5%. With the down payment, closing costs, money to establish escrows for taxes and insurance plus interest to finish out the month of closing, the total cost may be closer to 6%-8% of the sale price.
The interest rate you select will also have a bearing on these total costs. If you choose to go with a lower rate so that you can reduce your payment, you may end up paying additional money towards “points”. If you are comfortable with a slightly higher payment you may end up finding a lender that is willing to reduce the costs to close in favor of a higher interest rate.
Also, FHA allows the borrower to get the funds necessary to close from several sources. This can include areas such as personal savings, grants, gifts, loans from retirement accounts and seller contributions.
Benefits of FHA Loans
When you acquire a mortgage through an FHA Loan, you will have a lower minimal down payment and lower closing costs than you would have through a conventional loan. You will also find that because of the insurance you are paying to the Federal Housing Administration, it is easier to qualify and the lender will be more lenient on your credit rating.
First Time Home Buyers
An FHA loan might be just what you need! With an FHA loan your down payment can be as low as 3.5%. This may even include the accompanying closing costs and fees.
Purchasing a Fixer-Upper
With the FHA program, you have the ability to purchase a home, fix it up, and include all the costs within a single loan. If you already own a home that you wish to re-model or repair, you can refinance what you still owe and add the cost of repairs to a single FHA loan.
FHA Reverse Mortgages
If you are over 62 years old, live in the home to be mortgaged as your primary residence, and own the property outright/have a low loan balance, then the FHA Reverse Mortgage might be ideal for you. The FHA Reverse Mortgage lets you convert a portion of your equity into cash!
FHA Energy-Efficient Mortgage
If you wish to make renovations on your home in order to make it more energy efficient, you can include these costs in an FHA Energy-Efficient Mortgage. These renovations may include improving insulation, transitioning to light fixtures with lower energy consumption (such as LEDs), and other improvements.
FHA Loans for Manufactured Homes and Mobile Homes
FHA also has financing options for mobile homes and factory-built housing. They offer two loan products: one for those who own the land that the home is built on and another for mobile homes that are located in or destined for mobile home parks.