10/05/2019
Not all of today's home buyers have super-high credit scores and large down payments 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-down payment option for buyers with medium-to-high credit scores.
About The FHA Mortgage Program
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 :
Borrower must be a U.S. citizen or permanent resident alien
Borrower must show two years of income via W-2 and/or federal tax returns
Subject property must be residential
The complete FHA guidelines are thorough and include provisions which benefit buyers with little money for down payment, lower-than-average credit scores, and other non-standard needs.
FHA loans help more get people mortgage-approved.
FHA Loans Allow "Imperfect Credit"
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, and just last month, they implemented this waived waiting period. So if you have a recent Foreclosure, Short Sale, or Bankruptcy filing or discharge, you have the opportunity to qualify for a new loan now, instead of having to wait 2-4 years, depending on the derogatory credit item that occurred.
FHA Loans Allow 3.5% Down payment
You don't need a 20 percent down payment to use the FHA home loan program. The FHA guidelines state that home buyers must only make a 3.5% down payment.
Making a 3.5% down payment means that for every $100,000 borrowed, your must have $3,500 at closing, at minimum. The FHA allows you to exceed its minimum down payment requirements, if desired.
Not everyone will have the 3.5% down payment, and the FHA knows it. This is among the reasons why program guidelines permit your down payment to come in the form of a gift.
Down payment 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 Loans Carry Low Out-Of-Pocket Costs
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% down payment 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 homeownership and the program remains popular today.
Before you apply for an FHA mortgage, check today's FHA mortgage rates and see how much home you can qualify. Rates can always be given, 7 days a week. Call 360-703-3998 or apply for free online at www.nwloans. org
