FHA loans have been helping people become homeowners since 1934. The Federal Housing Administration (FHA) – which is part of HUD – insures the loan, so your mortgage lender can offer you a better deal.
FHA allows a buyer to purchase a home with as little as 3.5% down. They tend to be more lenient on areas such as credit, funds to close, and co-borrowers.
Some benefits of FHA loans are:
- Low down payments
- Low closing costs
- Easy credit qualifying
- Great rates
How your credit score affects your rate
Most loans use a method of analyzing credit called credit scoring in the underwriting process. Studies have demonstrated a direct relationship between low credit scores and higher mortgage delinquency rates. As a result many lenders have established minimum credit scores at which they will accept loans.
Unfortunately, a lack of credit, old delinquencies, or incorrect information on the credit report can cause a low credit score. FHA does not have specific credit score requirements. Although a high credit score may assist in getting the mortgage approved, a low score is not automatically cause for denial. If the credit scores are low, then it is up to the borrower to demonstrate his/her ability and willingness to pay the loan back. This allows the borrower to explain the circumstances surrounding the credit difficulties and have that explanation considered in the underwriting process.
The underwriter on an FHA loan will review the credit and payment history of a customer concentrating on the most recent 12 to 24 months. If the customer has had a good payment record over the past 12 to 24 months they can often get approved for a mortgage even when Conventional financing has turned them down. An experienced loan officer can help the customer clearly tell their story and will often make suggestions as to how to make the file more acceptable to FHA. Because of FHA’s leniency, some borrowers with past credit problems elect to use FHA for loans when they have a substantial down payment rather than getting a higher interest rate conventional loan. FHA tends to be more flexible than Conventional financing in the money needed to purchase the home.
In an FHA mortgage the customer must put at least 3.5% of the sales price into the transaction. Some of this money may be used for down payment and the rest for closing costs . Keep in mind, however,that the total cost to close on an FHA is commonly over the 3.5%. With the down payment, closing costs, money to establish escrows for taxes and insurance plus interest to finish out the month of closing, the total costs can be closer to 6 or 8% of the sales price.
The interest rate that you select will also have a bearing on the total costs. If you select a lower rate so that you can reduce your payment, you may end up paying additional money towards “points”. At the same time if you are comfortable with a slightly higher payment you may find a lender that is willing to reduce the costs to close in favor of a higher interest rate.
FHA allows the borrower to get the funds necessary to close from several sources. They include such areas as personal savings, gifts, grants, loans from retirement accounts and seller contributions.
What does FHA have for you?
Buying your first home? – FHA might be just what you need. Your down payment can be as low as 3.5% of the purchase price, and most of your closing costs and fees can be included in the loan. Available on 1-4 unit properties.
Want a great rate? – Many lenders have artificially widened margins on their FHA loans. Our lenders do not. Reach out for a quote, you will like what you hear. We don’t believe in taking advantage of people because they are “only” putting 3.5% down, or might not have the best credit.
No Income Limit – Many programs used by first time homebuyers are not available if you are higher income, but our FHA loans are available no matter your income level.
Need flexible credit requirements? – Many home buyers that cannot get a conventional mortgage, can get an FHA mortgage.
Need help with that 3.5% down? – We even have programs available to finance the down payment on FHA loans to help you get into a home with little to no money down.
Let’s see if an FHA loan is right for you
Call Chris Mason with America’s Home Loans at (415) 846-9211 or schedule a free 30 minute consultation using our online form to get all your FHA questions answered.