You likely hear the advantages of the FHA loan being talked about often. They are a great first-time homebuyer program, but that is not the only demographic that they are meant to help. Anyone that has extenuating circumstances may be able to benefit from an FHA loan, even those that think they are not eligible. If you are unfamiliar with the terms of this type of loan, learn its benefits to determine if it is the right choice for you.
Credit Guidelines are Easier
One of the best advantages of the FHA loan is the leniency they offer with regards to the credit guidelines. With conventional loans, you often need a credit score that is over 680 in order to obtain a decent interest rate and to not have to pay large amounts of origination fees. With an FHA loan, the focus is not so much on your credit score, but on your credit history. Your credit score itself can be as low as 580 and still allow you to be eligible. They look for the number of late payments you have or any delinquent accounts that have not been settled. If your delinquencies are in the past, they often overlook the lower credit score.
Less Money at Closing
If you cannot afford the closing costs, most FHA loans enable the lender to contribute most or all of the closing costs. This means that you have to bring less money to closing – typically just the 3.5% of the purchase price that you are putting down. Even that money can be provided to you as a gift, which decreases the amount of money you need to bring to the closing even further. If you cannot pay the upfront mortgage insurance at the closing, which is 1.75% of your loan amount, this fee can usually be rolled into your mortgage.
More Flexible Debt-to-Income Ratios
FHA loans do not have strict rules regarding your debt-to-income ratio. This means if you are over the conventional limit, you should look into your ability to get an FHA loan. This is a good option for those borrowers that may have a little more debt than they should carry, yet know that they can afford a mortgage payment. You have to be able to prove that your job is stable and that you have a decent credit history that does not show that you are consistently late on your monthly payments.
Refinancing is Simple
In the future, if you want to lower your rate, the process to refinance into a new FHA loan is simple! You do not have to go through even half of what you go through to obtain the initial loan. The original purchase price of your home will be used for the appraisal, you do not need to verify your income or employment, and your credit is not pulled. Basically, you just have to prove that a refinance would benefit you in some way, such as allowing you to save a few hundred dollars a month by decreasing the interest rate and you will get approved for a new FHA loan with a lower rate.
FHA loans are very beneficial for many people. If you are not the average home buyer with excellent credit, plenty of assets, and steady income, the FHA loan could be a good alternative for you. As long as you understand the fees, including the upfront mortgage insurance and the monthly insurance fees, you will be able to get a loan that gets you into the home you want with very little money down and very easy qualifications.