The Federal Housing Administration (FHA) loan program is great for those looking to buy or refinance a home with little money down and/or less-than-perfect credit.
What Is It?
The National Housing Act of 1934 created the FHA specifically to promote homeownership. The FHA loan offers competitive interest rates and less stringent requirements compared to other home loan programs. This increases the number of people who can fulfill their dreams of homeownership.
Since the government backs these loans, lenders have more confidence to make mortgage loans in cases they normally would not. This also gives people who are getting back on their feet more home loan options, as the maximum loan amount is $275,665.
What Makes It Great?
Here are the most attractive features:
- Small down payment: buyers use these loans since it allows them to put as little as 3.5% down toward their home purchase. You can always put more down to lower your monthly payment and have more equity in the home. You could also save more over the life of your loan by putting more money down.
- No income limit!
- Flexible credit score requirement: a core credit requirement is a FICO credit score of 600 or higher.
- Help is accepted: it's easy to use gifts from mom, dad, or a relative for your down payment and closing costs. FHA coordinates well with community lending programs offering additional assistance for down payment and closing costs.
- A chance to reset: two or three years after financial hardship, such as bankruptcy or foreclosure, is usually enough time to qualify for FHA-backing.
- Home improvement: If you are buying property that is going to need an upgrade, the FHA 203K renovation loan can be used to pay for home improvements.
- Competitive mortgage insurance rates: FHA has reduced monthly mortgage insurance (MI) for lower credit scores as compared to a conventional loan.
Do I Qualify?
Reach out to one of our local loan officers and they'll take the guesswork out of your loan qualification. The FHA program makes qualifying simple. In addition to your credit score and funds saved or gifted, we also look at another item to qualify you for a loan: your debt-to-income (DTV) ratio. Lenders need this ratio to gauge if it’s safe to lend you money. To qualify, you will need a reasonable monthly DTV. Typically, the average ratio should be around 31% or 43% of your income, but some loans can be approved with closer to 50% debt level.
Example: You earn $3,500 per month.
- To meet the requirements, it’s best to keep your monthly housing payments below $1,085 (which is 31% of $3,500).
- If you have other debts (i.e. credit card debt), all of your monthly payments combined should be less than $1,505 (43%).
Each person will feel comfortable with a different debt ratio as we all have different expenses and goals. Speak with one of our FHA approved loan officers who will help you find the best balance for your situation.