If you’re interested in getting a home loan, you’ve probably heard of an FHA Loan.
But what are FHA Loans exactly and who qualifies? Can you get an FHA loan with bad credit?
We’re going to teach you everything you need to know about FHA loans.
FHA mortgages are the easiest type of loan to qualify for in 2017. The credit and down payment requirements are very low allowing more people to qualify.
What is an FHA Loan?
FHA loans are a type of home loan that is insured by the government. FHA is short for the Federal Housing Administration, which is a government agency. FHA Loans made buying a house with bad credit possible for many homebuyers.
You don’t need a 620 credit score to qualify for a mortgage.
FHA requires a credit score of 500-579 with 10 percent down. However, getting approved with a score is much more difficult. You can even qualify for an FHA mortgage with no credit. The lender will be able to use non traditional lines of credit, like rental history, phone bills, etc.
If your credit score is below 580 it is highly recommended that you improve your credit score before applying.
If you have a 580 or higher credit score you are eligible for an FHA loan with a 3.5% down payment. FHA loans are the perfect way for people to buy a house with bad credit.
FHA Loans for First-time Home Buyers
Many people in America have heard of an FHA loan and believe it’s just for low income, or are bad credit loans. This is not the case at all. FHA loans are the most popular type of home loan product used in the US. Approximately 40% of all home loans in the U.S. are FHA home loans. They are very popular for first time home buyers because of their flexible qualifying guidelines and low down payments.
Low income first time home buyers
FHA loans are good for low to median income first time home buyers well. FHA allows lenders more flexibility on debt to income ratios than traditional mortgages. Many low income borrowers are able to get approved for a home loan through the FHA.
First time home buyers with bad credit
Since many first time buyers have poor credit, FHA loans make a lot of sense. A 500 credit score is needed for FHA with 10% down. If you have a credit score of at least 580 you can qualify for FHA with just 3.5% down. For borrowers with scores in the 500-579 range, you should work on improving your credit scores before applying for a mortgage. There are tips to increasing your score later on. Or you can skip to our article on how to improve your credit scores in 30 days.
Who should get an FHA Mortgage?
FHA Loans are great for anyone that’s looking to purchase a home. This is because the requirements and guidelines for FHA is much more linnet than traditional mortgages making them easier to qualify for.
Candidates for FHA Loans
- Borrowers will low credit scores
- Anyone that cannot afford a large downpayment
- If you are receiving your downpayment as a gift
- If your debt-to-income ratio is high
- First time home buyers
FHA Downpayment Requirements
One of the greatest benefits of an FHA loan is the low 3.5% downpayment, which is much lower than other mortgage programs. Typically, conventional mortgages require no less than a 5% downpayment and can be as high as 20%.
As an example, if you’re buying a $200,000 house, a private loan will require no less than 5% down, or $10,000o, which is a best case scenario. If you get an FHA loan your down payment will be 3.5%, which is $7,000 for a home costing $200,000.
FHA Downpayment Gifts
Another great benefit for FHA borrowers is that the downpayment can be gifted to you. The downpayment of 3.5% can be a gift, as long as the person gifting the down payment meets FHA guidelines.
A relative, charity, your employer or workers union, even a friend can gift you the funds for your downpayment as long as the friend has invested interest in the borrower. You will need to fill out a gift letter for the mortgage downpayment.
2017 Updated Loan Limits for FHA
The FHA loan limits were recently increased for 2017 from $271,050 to $275,665 for low-cost areas. This is the maximum loan amount for FHA loans in 60% of the U.S. The limits go up to $636,150 is high-cost areas, such as Los Angeles and San Fransisco.
|Units||Low-Cost area loan limit||High-Cost area loan limit|
FHA Mortgage Insurance Premium
FHA loans require private mortgage insurance, referred to as MIP (mortgage insurance premium) or PMI (private mortgage insurance). The mortgage insurance premiums can be cancelled if you acquired your loan after December 31st, 2000, and before July 3rd, 2013 and have a LTV balance of 78% or less, and you meet the requirements in mortgagee letter 2000-46.
HUD changed the rules about cancelling FHA mortgage insurance. If you got your mortgage after July 3rd, 2013 the FHA will not let you cancel mortgage insurance if you put less than 10% down. However, if you have paid down the balance to under 78% LTV and original put a 10% or higher down payment you can cancel PMI.
FHA (MIP) Mortgage insurance premiums (Updated for 2017)
- Downpayment of less than 10% = PMI will be 0.85% and is required for the life of the loan
- Downpayment of 10% or more = PMI is 0.80% and will drop off when the LTV reaches 78%
FHA property standards
- Single family and 2-4 unit properties
- FHA approved condos and town homes
30 year and 15 yearFixed rates or Adjustable loans
An FHA loan can take various forms. It may be a fixed-rate mortgage or a 15 year fixed rate or 30 year fixed rate, adjustable rate mortgages are also available.
FHA Borrower Requirements
- 500-579 credit score requirement with a 10% down payment.
- 580+ credit score requirement for borrowers with at least a 3.5% downpayment.
- The down payment can be a gift from a friend or family member.
- The Federal Housing Administration requires you to pay for an appraisal of the home. An appraisal must be done by an FHA approved appraiser. If problems are found with the house, the FHA may require them to be fixed before the loan can move forward. If repairs are needed to the property, the seller will need to make the required repairs before closing.
- Private mortgage insurance is required for the life of the loan in the event you default on the loan.
- Must show steady employment and be able to prove income with recent tax returns, W2’s, and paycheck stubs.
- Two years of employment at the same company. If you changed jobs within the last two years as long as you are still in the same field you still can be eligible.
- Non-occupying co-borrowers allowed
- Legal residence and be at least 18 years old.
- Must occupy the home as primary residence.
- Social security number is not required.
Comparing FHA vs Conventional Loans
There are many differences in FHA vs Conventional loans. For one, FHA requires a low down payment of just 3.5% with a 580 credit score. You can get approved for an FHA loan with a 500-579 credit score with 10% down. However, it is very difficult to process a loan application with a credit score in this range. If you have at least a 580 credit score it is easier to qualify for an FHA mortgage.
FHA vs Conventional Advantages
- Lower 580 credit score requirement
- Lower interest rates than with conventional loans
- 3.5% dowpayment
- Downpayment can be a gift from a friend or family member
- Higher allowed debt-to-income ratios
- Easier to qualify for
- They are assumable
- Sellers can pay up to 6% of the closing costs
- Non-occupying co-borrowers and co-signers allowed
FHA vs Conventional Disadvantages
- Lower loan limits
- Homes that need renovations do not qualify
- Mortgage insurance is required regardless of down payment
- PMI costs are higher
- Upfront PMI is required
- More required paperwork
FHA loans offer a wealth of benefits for many home buyers. They are easier to qualify for, offer lower interest rates and lower loan fees. They’re available for many people who would not otherwise qualify for a home loan due to poor credit or in some cases, no credit history at all.
Are you considering using an FHA loan to buy a home? Simply fill out the form on our home page to compare multiple home loan offers and get a free no-hassle consultation with lenders in our network. Home ownership may be well within your reach!
Common FHA Loan FAQ
What is a FHA loan?
An FHA loan is a mortgage that is backed by the Federal Housing Administration. The FHA does not fund loans, they insure the loan in the event the borrower defaults the lender can recoup their money.
How do I get a FHA mortgage with bad credit?
Technically the minimum credit score required for FHA loans is a 500 with 10% down. However, if you have at least a 580 credit score you could qualify for an FHA loan with a down payment of just 3.5%
Do I need to get a home appraisal?
Yes. Most FHA mortgages will require an FHA home appraisal.
Who can qualify for FHA home loans?
Anyone can qualify as long as you do not currently have an FHA loan and you intended to occupy the property as your primary residence. You must meet the minimum credit score requirements, have a 3.5% downpayment and steady income and employment history.
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