A conventional mortgage loan isn't your only option when buying a house; depending on your circumstances, FHA mortgages make sense. However, you might not consider this option if you’re unfamiliar with these particular loans. The truth is, FHA mortgages have helped countless achieve their dream of ownership. Here are a few important things to know about these loans.
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1. The FHA Doesn't Issue Loans
FHA mortgages are insured by the Federal Housing Administration. However, this government agency does not issue loans. These loans are issued by approved mortgage lenders, therefore, you’ll need to go through a bank to obtain FHA financing for your house.
2. You Don't Need Perfect Credit
If you apply for a conventional loan, the lender will require a minimum credit score of 680 to 700. This can pose a problem if you’ve had credit problems in the past. However, FHA mortgages have flexible credit requirements — you can get approved with a credit score as low as 620.
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3. Low down Payment Requirement
A down payment is one of the biggest hurdles to buying a house. Conventional mortgages require a minimum down payment of 5%. However, a lender may require a down payment as high as 10%, if you have less-than-perfect credit. With an FHA mortgage, the down payment requirement is only 3.5% of the purchase price.
4. No Cash Reserve Required
If you’re applying for a conventional loan, your lender may require that you maintain a cash reserve after paying your down payment and closing cost. This varies by lender, with some lenders requiring at least 3 to 6 months of mortgage payments in the bank. Currently, there are no cash reserve requirements with FHA mortgages.
5. You Can Negotiate Seller Paid Closing Costs
In addition to a down payment, buying a home requires that you pay closing costs. Fortunately, FHA mortgages do allow closing cost assistance. Sellers, banks and builders can pay a portion or all of a buyer’s closing costs. These expenses typically range between 3% and 5% of the loan amount, which can be another roadblock to home ownership. Since the Federal Housing Administration encourages home buying, this provision puts ownership within reach for many families.
6. Higher Limits for Housing and Debt
With a conventional loan, your house payment cannot exceed 28% of your gross monthly income. Additionally, your total debt payments cannot exceed 43% of your gross monthly income. There is flexibility with FHA mortgages. Apply for this type of home loan and your lender may allow a housing ratio up to 30% of your gross income, and your total debt to income ratio can go as high as 45% of your gross monthly income.
7. Ability to Finance Extra Repairs
If a house that you're purchasing needs work, you may be able to qualify for an FHA 203(k) loan. With this loan, you can finance up to $35,000 in non-structural repairs. Use the extra cash to replace the carpet and flooring, repaint the house, repair fixtures or maybe replace the cabinetry throughout the property.
An FHA mortgage can be your golden ticket if you have a low credit score and small cash reserves. But although these loans are flexible, you'll need to meet basic requirements. For example, the lender will require copies of your tax returns from the past two years to verify your income, and your most recent credit history must be positive. If you can meet these requirements, you’re one step closer to buying a house.
Did an FHA mortgage help you get a home?
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