Most borrowers have heard of FHA home loans. They are very common. You hear about them mostly as loans for first time borrowers, which is common. However, most people don’t realize that FHA loans can also be does for refinancing. They are not only for purchasing a house.HUD owns and operates FHA, which is a program designed to help borrowers who might have difficulty buying a house.
If the borrower falls within FHA’s requirements FHA insures the loan for the lender, which makes the loan very low risk for the lender, which is very good for the borrower. It could mean a lower interest rate, better terms and just an overall better loan.FHA’s requirements are; a down payment of 3-5%, the home must be under the FHA’s set loan limit for the county that the borrower lives in and a few other small requirements.The main advantage to an FHA loan, is if you can fall within their requirements, your credit history or income level, will not hold you back from getting a home loan.
If you are getting turned down from other lenders because of a high debt to income ratio or because your credit is bad. You may want to consider applying for an FHA loan, where those requirements are either non-existent or much more flexible.If the idea of down payment is holding you back, consider also, that FHA loans allow the use of a non-profit organization as a source for the down payment, which opens up the option of using down payment assistance programs like Neighborhood Gold.To view our list of recommended mortgage lenders online, who offer FHA
How to qualify for an FHA loan
To be eligible for an FHA loan, borrowers must meet the following lending guidelines:
- FICO score of 500 to 579 with 10 percent down or a FICO score of 580 or higher with 3.5 percent down.
- Verifiable employment history for the last two years.
- Income is verifiable through pay stubs, federal tax returns and bank statements.
- Loan is used for a primary residence.
- Property is appraised by an FHA-approved appraiser and meets HUD property guidelines.
- Your front-end debt ratio (monthly mortgage payments) should not exceed 31 percent of your gross monthly income. Lenders may allow a ratio up to 40 percent in some cases.
- Your back-end debt ratio (mortgage, plus all monthly debt payments) should not exceed 43 percent of your gross monthly income. Lenders may allow a ratio up to 50 percent in some cases.
- If you experienced a bankruptcy, you must wait 12 months to two years to apply, and three years for a foreclosure. Lenders may make exceptions on waiting periods for borrowers with extenuating circumstances.
FHA vs. conventional loans
Unlike FHA loans, conventional loans are not insured by the government. Qualifying for a conventional mortgage requires a higher credit score, solid income and a down payment of at least 3 percent for certain loan programs. Here’s a side-by-side comparison of the two types of loans.
FHA loans vs. conventional mortgages
|Credit score minimum
||Between 3% to 20%
||3.5% for credit scores of 580+; 10% for credit scores of 500-579
||10, 15, 20, 30 years
||15 or 30 years
|Mortgage insurance premiums
||PMI: 0.5% to 1% of the loan amount per year
||Upfront premium: 1.75% of the loan amount; annual premium: 0.45% to 1.05%
||Variable rate, fixed rate