Are you looking to buy a new home? But don’t have a cash on hand or you were not able to qualify for a conventional loan? Now you’re thinking of what type of loan you can get with lower down payment and easy qualification? With better mortgage rates, smaller down payments and lower closing costs. FHA loanscan help you buy a home if you don't qualify for a conventional loan. We'll help you understand whether FHA loans are right for you.
An FHA loan is a mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low-to-moderate income borrowers who are unable to make a large down payment.
Following is information regarding FHA loans. Disclaimer: We are not mortgage brokers and are only providing this information as a reference. Please refer to hud.gov for more info or contact your loan provider directly with any questions.
FHA Credit Score Requirements
To qualify the borrower must have at least 500 credit score for 90% loan-to-value, or 10% down payment. But it is not likely you will be approved as a subprime borrower with scores below 580. If a borrower has a 580 credit score they will be required to have just a 3.5% down payment. You must improve your credit score when your credit score is below 580.
First Time Homebuyers with bad credit
For first time homebuyers that has poor credit score, FHA loans make a lot of sense. A 500-credit score is needed for FHA with 10% down. If you have a credit score at least 580 you can qualify for FHA with only 3.5% down.
We all know that when we have a poor credit score history means we will have a higher interest rate and the monthly payment is higher as well. For those borrowers with score ranging from 500-579, I recommend working on improving your credit scores before applying for a mortgage. You can check our article on how to improve your credit score (paste the link)
Candidates for FHA Loans
· Borrowers who experienced foreclosures or short sales
· Borrowers without big down payment
· First Time Homebuyer, but not only then
· Borrowers with high debt
· Borrowers with lower credit scores
· Borrowers who needs higher maximum amount
Down Payment Requirements
Borrowers can qualify for an FHA loan with a down payment as little as 3.5% for a credit score of 580 or higher. The borrower’s credit score can be between 500 – 579 if a 10% down payment is made. It’s important to remember though, that the lower the credit score, the higher the interest borrowers will receive.
As an example, if you’re buying a $250,000 house, a private loan will require no less than 5% down, or %12,500, which is best case scenario. If you get an FHA loan your down payment will be 3.5%, which is $8,750 for a home costing $250,000.
Down Payment Gifts
Another great benefit is that the down payment can be gifted to you. The down payment of 3.5% can be a gift, if the person gifting the down payment meets FHA guidelines.
Your relative, a charity, your employer or workers union, even your friend can gift you the funds for your down payment if the friend has invested interest in the borrower.
Overview of 2018 FHA Loan Limits
The FHA’s national low-cost area mortgage limits for 2018 are set 65% of the national conforming limit of $453,100 (for one-unit property). Please see below for the specific amounts for this category, by property type:
1 Unit: $294,515
2 Unit: $377,075
3 Unit: $455,800
4 Unit: $566,425
For Hight cost area (with comparatively high home prices) are set 150% of the national conforming cap of $453,100.
1 Unit: $679,650
2 Unit: $870,225
3 Unit: $1,051,875
4 Unit: $1,307,175
Special exception areas are places that have higher construction costs. These areas include Alaska, Hawaii, Guam, and the Virgin Islands. In 2018, these four special exception areas have a higher FHA loan limit ceiling, as shown below:
1 Unit: $1,019,475
2 Unit: $1,305,325
3 Unit: $1,577,800
4 Unit: $1,960,750