What are the Advantages to an FHA Loan?
An FHA loan is a home loan, or mortgage, that is backed by the Federal Housing Administration. What are the advantages to an FHA loan? Important point of fact here: These loans are backed by the FHA, not administered, underwritten, or provided by the FHA. All of these loans are provided by private lenders who are approved by the Federal Housing Administration, and all have to follow a certain set of guidelines.
Like conventional loans, FHA loans offer their own set of advantages to homebuyers because of how they’re administered, and who these loans are meant for. FHA loans appeal to a diverse set of the population because these loans serve the purpose of putting Americans in their own homes (What is an FHA Loan?, n.d.).
- First time homebuyers with average credit scores
- First time homebuyers with lower credit scores
- Non-First time homebuyers with limited funds for a down payment
- Non-First time homebuyers with credit issues
- Millennials for any number of reasons and variations
With conventional loans, the typical requirement for minimum allowable credit score sits somewhere from 620 to 640. On the spectrum of Credit Scores, this falls midway in the Fair column. The lower the credit score of a homebuyer, the higher their interest rates will usually be.
With FHA backed loans, a potential homebuyer can qualify for a loan with a credit score as low as 500. Interest rates and down payment requirements vary with a person’s credit score, but because of FHA loans, people with lower credit scores are otherwise eligible for loans.
Another Great FHA Advantage is Your Down Payment
Your down payment serves multiple functions.
- It shows your potential lender that you’re serious about the purchase you’re making and you understand the commitment.
- If you have a lower credit score, coming up with a larger down payment can serve as a compensating factor.
- This is applied to the purchase, so whatever you put down is the part of your homes initial price tag that’s now paid.
With Conventional loans, the requirement for the down payment ranges from 5% to 20%. With an FHA backed loan, if your credit score is 580 or above, you may be able to qualify for a loan with a down payment of 3.5%, but that changes to 10% if your credit score is 500 to 579.
Your Credit History
Your credit history is that file that the three credit reporting bureaus, Experian, Equifax, and TransUnion, provide FICO. It contains your financial history in its entirety.
- Payment History of bills and credit cards
- Credit card limits and use
- All of your accounts and how long each have been open
- Any open liens or mortgages
With this information, not only does FICO provide that 3 digit credit score to lenders, but lenders also have access to your Debt to Income Ration (DTI).
With any type of loan, if you have a foreclosure or bankruptcy in your credit report, it’s going to impact your ability to procure a loan. One of the rehabilitation requirements is that you work on improving your overall credit score, financial habits, and DTI.
The other includes a wait period. For conventional loans, the wait period tends to be about 4 years but may vary from lender to lender. With FHA loans, as long as you’re at least 2 years out of bankruptcy, and you’ve worked toward establishing good credit, you can qualify for a loan.
What are the advantages to an FHA loan? It’s Assumable
An assumable loan is a mortgage that the buyer of a home takes over from the seller. This nearly always requires the approval of the original lender since the buyer is asking to take over a loan they provided. Sometimes some renegotiating of terms is involved, but usually the terms remain very similar to the original loan.
One great thing about an FHA backed loan is that the down-payment can be provided by gift up to 100%. With conventional loans, this cap is at half.
A gifted down payment is a scenario where a family member provides the potential home-buyer with their down-payment with no expectation of re-payment: Like all gifts. A family member may even gift a buyer funds to pay closing costs.
Also, down payments can be provided by any number of “Down Payment Assistance Programs,” and the awesome thing is that the FHA provides a curated lists of assistance programs offered in 45 different states (htt).
- Step Up Program
- Cook Inlet Down Payment Assistance Program
- ADFA Down Payment Assistance
- Capitol Federal Closing Costs Assistance Programs
- Expand to Homeownership
- My First Texas Home
- Movin’ Up Program
- Keystone Advantage Assistance Loan Program
That full list can be found here https://www.fha.com/fha-downpayment-grants.
Basically, the primary advantages of FHA loans are the requirements:
- Smaller down payments are needed
- More flexible guidelines are offered
- Higher acceptable DTI’s
- These loans may be assumable
- Acceptability of lower credit scores
- The down payment may come from gifts or down payment assistance programs which the FHA provides a list of.
(n.d.). Retrieved from https://www.fha.com/fha-downpayment-grants
What is an FHA Loan? (n.d.). Retrieved from Zillow: https://www.zillow.com/mortgage-learning/fha-loan/