Posted October 4, 2013Tweet
Not all of today's home buyers have super-high credit scores and large downpayments to make. Some have relatively okay credit scores and very little savings at all.
The good news is that, in our expanding U.S. economy, buyers of both groups can apply for low-rate mortgages. Buyers in the former group may be drawn to conventional financing via Fannie Mae or Freddie Mac. Buyers in the latter group may prefer an FHA mortgage.
The FHA loan can be an excellent low-downpayment option for buyers with medium-to-high credit scores.
The first thing to know about FHA mortgages is that the FHA is not a lender. Rather, the FHA is an insurer of mortgages. The FHA reimburses lenders when the loans they make go into default or foreclosure.
FHA stands for Federal Housing Administration. The group is a government agency within the U.S. Department of Housing and Urban Development. The FHA is self-funded, and takes no taxpayer money, and has never taken taxpayer money.
The FHA is the only federal agency which can make this claim.
The FHA will insure any loan which meets its collection of "rules", known as the FHA Mortgage Guidelines. FHA guidelines for a purchase mortgage include such specifications as :
The complete FHA guidelines are thorough and include provisions which benefit buyers with little money for downpayment, lower-than-average credit scores, and other non-standard needs.
FHA loans help more get people mortgage-approved.
With respect to credit scores, FHA mortgage guidelines are looser than the guidelines of comparable loan types including loans backed by Fannie Mae or Freddie Mac.
First, the FHA allows borrowers to carry below-average credit scores -- something you cannot do with conventional mortgage financing. In general, the FHA's minimum FICO threshold for mortgage applicants sits 40 points below that of Fannie or Freddie.
Second, FHA guidelines allow for credit score exceptions when hardship has occurred. This, too, is not allowed with Fannie Mae and Freddie Mac.
Lastly, the FHA won't charge you higher rates or higher fees for less-than-perfect credit scores. Fannie Mae and Freddie Mac may charge as many as 3 discount points to your loan for having "low scores".
Your credit can be "banged up" and you may still qualify for an FHA loan. Prior foreclosures, short sales, and bankruptcies don't disqualify you from FHA financing. Neither do judgments or collections. You should expect to explain how these events occurred, but none will result in automatic dismissal.
The FHA enforces a 3-year waiting period after foreclosure. In 2012, there was talk that the FHA would waive its 3-year waiting period.
You don't need a 20 percent downpayment to use the FHA home loan program. The FHA guidelines state that home buyers must only make a 3.5% downpayment.
Making a 3.5% downpayment means that for every $100,000 borrowed, your must have $3,500 at closing, at minimum. The FHA allows you to exceed its minimum downpayment requirements, if desired.
Not everyone will have the 3.5% downpayment, and the FHA knows it. This is among the reasons why program guidelines permit your downpayment to come in the form of a gift.
Downpayment gifts can come from a multitude of sources including family members, employers, approved charitable organizations, or the government as part of a housing grant program.
Most loan programs require buyers to bring at least some of their own money to a closing.
FHA guidelines are also more favorable toward "closing costs" than other loan types including conventional, USDA and VA loans. The FHA guidelines specifically permit sellers to give up 6% of a home's purchase price to an FHA buyer to pay for loan closing costs.
Few loans have anywhere near 6 percent in closing costs which means that FHA buyers can have their closing costs paid-in-full with no catch. The allowance keeps buyers from having to bring more than the minimum 3.5% downpayment to closing.
The FHA also allows buyers to finance certain energy-efficiency improvement into their loans; as well certain home repairs. Your FHA lender can help you determine which costs are allowed and which costs are not.
Lastly, as compared to other loan types, it can be easier to do a zero-closing cost mortgage via the FHA. This, too, can benefit buyers.
FHA loans help buyers of all types -- not just first-time buyers and certainly not just those with less-than-perfect credit. The FHA guidelines are meant to promote homeowners and the program remains popular today.
Before you apply for an FHA mortgage, take a look at today's FHA mortgage rates and see for how much home you can qualify.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
The Mortgage Reports has provided me with helpful advice. I enjoy all the various types of mortgage information. Thank you!
Sarah M. Office Manager
The Mortgage Reports has been an invaluable resource to me -- it helped me to pick the sweet spot to refinance. Thanks!
Jerolyn C. CPA
The Mortgage Reports isn't just basic mortgage rate information -- it's analysis on rate changes and trends, and updates on the laws in lending. Subscribing to the site's daily updates is worthwhile.
2014 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.