The Multiple Benefits of FHA Loans
FHA loans are popular no matter how the economy is doing. Largely made to first-time buyers, FHA loans are easier to qualify for than conventional loans. Here is a rundown of several benefits you get when you obtain an FHA loan.
Low Down Payments
One of the most attractive benefits of an FHA loan is you only need to come up with a modest down payment. The minimum you can put down is 3.5 percent, no matter what state you live in. However, keep in mind that you can lower your monthly payments if you can make a larger down payment than the minimum percentage. Additionally, as the buyer you must be the party that provides the down payment. The seller cannot make a down payment for you, but they can pay closing costs or other items.
Lower Credit Score Cutoff
The requirements for down payments and credit score approval level is much lower than for standard loans. According to the US Department of Housing and Urban Development (HUD), you can generally qualify with a credit score is low as 580 and a down payment of 3.5 percent. Depending on the lender, conventional loans require credit scores from the mid-600s to the low 700s. On the other hand, few lenders will provide loans to any borrower with credit below 620.
Flexible Debt Ratios
The FHA lets you use 29 percent of your income for housing costs and 41 percent for expenses and long-term debt. You will garner additional leeway if you can come up with a bigger down payment, show a healthy net worth or demonstrate that you have significant savings set aside. You also get some consideration if you apply for a lower amount than the maximum FHA loan available. Talk to a loan officer to see if any of these situations allow your debt to income numbers to be re-calculated.
If you ever decide to refinance your loan, note that FHA loans offer streamlined refinancing. That means the lender only needs to handle minimal documentation in underwriting requirements to process the refinancing. There are requirements: your mortgage must be current, it must be insured by the FHA, the refinancing must result in a net benefit to you, and any cash beyond $500 cannot be taken out of the refinanced mortgage.
Down Payment Gifts
FHA loan policy requires that down payments come from an "approved source." Approved sources are your own cash savings, savings bonds or similar financial vehicles. The FHA policy is designed to prevent you from using credit cards, payday loans or other non-collateralized sources for your down payment. The good news is you can use gift money for a down payment as long as it is a bona fide gift. In other words, the person giving you the gift cannot expect repayment. The donor must be your relative, a close friend, a governmental agency, charitable organization or your union or employer.
FHA Loans Are Assumable
When you are ready to sell, buyers can take over your FHA loan instead of having to get a new mortgage at whatever future mortgage rate is available. This is advantageous to them because mortgage rates tend to climb over time. However, buyers still must meet the requirements for a mortgage, and depending on your equity, they may have to come up with a bigger down payment.
In the mid-2000s, only around 10 percent of purchase loans were backed by the FHA. Currently it is around 26 percent after peaking at 40 percent at the end of 2009. As long as they offer the great benefits covered above, FHA loans will continue to be a valuable and popular home financing source.