This BLOG On Guidelines For FHA Home Loan With 3.5% Down-Payment Was UPDATED On January 14th, 2019
Do you wish to buy a new house, but your pockets aren’t full of cash or you have a low credit score? Yes? Then, unfortunately, you won’t find it easy to qualify for a conventional mortgage. Don’t fret; there is a loan option you can consider in this scenario. Below article about guidelines for FHA home loan will walk you through getting a home loan with 3,5% down-payment.
Borrowers who have a low credit score and can’t afford to pay a large amount in down payment mostly choose FHA home loan to purchase a new home. The reason is that the guidelines for FHA are much more lenient than conventional home loans and borrowers can qualify for them more easily than for conventional loans. If you haven’t heard about the FHA yet, you are at the right place.
In this post, I’ll provide detailed information about FHA home loan. Once you are finished reading this post, you’ll know what the FHA home loan is, what its requirements are, what the limits on FHA loan are, what the interest rates on FHA loan are and how you can get an FHA home loan. So, without further ado, let’s talk business.
In order to increase the ownership of homes in the U.S., the government created the Federal Housing Administration (FHA). FHA recognizes that not everyone can afford a large down payment and has a good credit score, therefore, it provides the FHA home loan and ensures it. As an FHA home loan is insured by the FHA, lenders are protected from loss if a borrower defaults on paying the mortgage payments. Therefore, its requirements are much more lenient than conventional home loans.
An FHA home loan is mostly a popular choice for buyers who are purchasing the home for the first time because it allows a low down payment (3.5 percent) with a 580 or more credit score. If your credit score is anywhere between 500 to 579, you can still qualify for an FHA loan, but in this case, you’ll have to make a down payment of 10 percent. However, you should know that credit score is the most important factor in getting an FHA home loan. If your credit score is low, lenders will charge higher interest rate and it is also hard to close an FHA loan with a poor credit score.
If you want to buy a new home with an FHA home loan with the down payment of 3.5 percent, you must have a minimum 580 credit score to qualify. However, this doesn’t mean that if your credit score is less than 580, you won’t be able to qualify for an FHA loan. Even with a credit score below 580, you are still eligible for an FHA home loan, but you’ll have to pay a 10 percent down payment to secure a loan.
In addition to these basic requirements, you must also have a steady history of employment or you must have been working for the same employer for the last 2 years. You must be of legal age for signing a mortgage, possess a Social Security number that’s valid and lawful residency to qualify for an FHA loan.
The down payment of 3.5 percent that is required with guidelines for FHA can be given as a gift by another family member. You can get new FHA loans for primary residence only. An appraiser approved by the FHA must appraise your property before a loan can be provided to you. At appraisal, the property you are buying must meet specific minimum standards.
Your front-end debt-to-income ratio should typically not be more than 31% of your gross income. However, you can get approved for an FHA loan with a front-end DTI ratio up to 40 percent. In this case, your lender must provide justification to the FHA as to why they’re providing you a loan and believe that the risk is acceptable.
Your back-end debt ratio should typically not be more than 43% of your gross income. However, you can get approved for an FHA loan with a back-end debt ratio up to 50 percent. Again, your lender must provide justification as to why they are accepting your application and believe that the risk is acceptable.
Your minimum credit score must be between 500 and 579 for a maximum loan-to-value ratio of 90 percent with a 10 percent down payment. Your creditworthiness will be determined by FHA-approved lenders.
If you have experienced bankruptcy, you must wait for two years after you get out of it and reestablish good credit to become eligible with guidelines for FHA. The FHA-approved lender may make exceptions if one year has passed since you got out of bankruptcy and bankruptcy resulted from extenuating circumstances that weren’t under your control and you have managed your money more responsibly.
If you have experienced foreclosure, you must wait for three years after getting out of it and reestablish good credit to become eligible for an FHA home loan. The lender may make exceptions if foreclosure resulted from extenuating circumstances and you have managed to reestablish good credit.
An FHA loan is easier to get than a conventional loan because the down payment required is low and you don’t need a stellar credit to get approved for an FHA loan. For maximum financing, the down payment required with an FHA home loan is 3.5 percent. Even borrowers with a credit score of 500 can qualify for FHA home loans. If you cannot afford to pay a large down payment of 20 percent that is usually required with conventional mortgages and doesn’t have a good credit score, then you should certainly consider FHA home loan as you’ll find its conditions less stringent than other mortgages.
Even the people who have experienced foreclosure or bankruptcy can qualify for an FHA home loan provided the minimum waiting period required for the loan has passed and they have maintained a good credit.
One of the drawbacks in guidelines for FHA home loan is mortgage insurance. As the strict standards that apply in a conventional mortgage are not there in an FHA home loan, borrowers must pay mortgage insurance with this loan. Mortgage insurance that must be paid with FHA loans is of two kinds: one must be paid upfront in full or you can finance it into the loan while the other involves monthly payments.
This mortgage insurance must be paid upfront one-time. The borrowers must pay a 1.75 percent premium of the loan amount no matter what their credit score is. At the closing of the loan, you can pay this sum upfront or the amount can be included in your mortgage.
Although called annual mortgage insurance, but this involves monthly charges that are figured into the payment of your mortgage. The amount that must be paid in mortgage insurance is a certain percentage of the amount of the loan, based on loan size, loan’s length and a loan-to-value ratio of the borrower.
For example, if you are given a loan of $300,000 with a loan-to-value ratio less than 95% and the term of the loan is 30 years, then the annual mortgage insurance premium on this amount will be $2,400. This means that each month $200 of your monthly income will go towards paying annual mortgage insurance.
Mortgage insurance premium must be paid by the borrowers for the whole term of the length if the loan-to-value ratio was more than 90 percent during the loan’s origination. For LTV of 90 percent or less, mortgage insurance must be paid for 11 years or the term of the mortgage.
If the term of the loan is 15 years or less and the down payment is less than 10 percent, then the annual mortgage insurance must be paid for the life of the mortgage. If the term of the loan is 15 years or the down payment of 10 percent or more is made, then mortgage insurance premium must be paid for 11 years. If the term of the loan is more than 15 years and down payment of less than 10 percent is made, then mortgage insurance must be paid for the life of the mortgage. If a term of the loan is more than 15 years and the down payment made is 10% or more, then mortgage insurance must be paid for 11 years.
If the term of the loan is 15 years or less and the down payment is 22 percent or more, then there is no annual mortgage insurance payment. If the term of the loan is 15 years or less and the down payment made is less than 22 percent, then mortgage insurance is canceled at 78 percent loan-to-value ratio. If the term of the loan is more than 15 years and the down payment made is of 22 percent or more, then annual MIP must be paid for 5 years. If the term of the loan is more than 15 years and the down payment is below 22 percent, the annual MIP is canceled at 78 percent loan-to-value ratio.
The maximum amount you can borrow through an FHA loan is less than what you can get through conventional loans. The conventional loan limit in most areas is $453,100.
On the hand, in most areas of the United States, the maximum amount that can be borrowed with an FHA loan is $294,515. However, in most high priced areas, the guidelines for FHA limit are increased and the borrowers may be able to get of up to $679,650 in high-cost areas.
You can get an FHA home loan from an FHA-approved lender. There are several FHA-approved lenders out there who will offer you an FHA home loan. However, you should know that the requirements of various lenders vary. Some lenders put additional requirements on FHA loan other than those stipulated by the FHA which makes it difficult for borrowers to pass all guidelines for FHA. For example, with one lender you may be able to qualify for an FHA loan with a credit score of 500 while another lender won’t approve you unless your credit score is 580 or more. Therefore, when you are looking for an FHA home, shop around and search for a lender who strictly follows the lending requirements of the FHA.
If you have been denied a home loan or have any questions about real estate or mortgage please contact the author Gustan Cho of The Gustan Cho Team at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at firstname.lastname@example.org. Gustan Cho Associates Mortgage Group works when you work, so feel free to contact him any time.