Ever been to a social gathering when the topic turns to real estate? It’s a pretty common topic. Nearly everyone, at some point in their lives is looking for a new home. They’ll talk about the homes they like, the kitchen cabinets, the number of bedrooms, the size of the yard, etc. Have you ever noticed that the topic that’s less spoken about is the mortgage process? Even rarer is the credit score a person needs to get a good loan rate.
Seriously, it’s like talking about the 2016 election, who you voted for and why. No one is particularly fond of spouting out their credit score, their monthly payments or the down payment they made to secure their loan. Mortgages definitely are very personal indeed.
Today, we’re going to get personal and spill the tea on what it really takes to get a mortgage optimum for you.
Mortgages Types and Definitions
First, let’s talk about types and to keep it simple we’re going to talk specifically about FHA Loans. There are other kinds of mortgages i.e. conventional mortgages which can have even lower interest rates and mortgages for investment properties. Contact us here if you want to discuss those.
According to fha.gov (ref) these are the following types of mortgages available to residential home buyers. Click on the name of the mortgage to get more info on it
An FHA loan benefits those who would like to purchase a home but haven’t been able to put money away for the purchase, like recent college graduates, newlyweds, or people who are still trying to complete their education.
The FHA adjustable rate mortgage is a HUD mortgage specifically designed for low and moderate-income families who are trying to make the transition into home ownership.
Many homeowners with adjustable rate mortgages find themselves in financial trouble because of current interest rate increases. FHA Secure refinancing can help when foreclosure is a threat.
An FHA reverse mortgage is designed for homeowners age 62 and older. It allows the borrower to convert equity in the home into income or a line of credit.
The FHA Energy Efficient Mortgage program helps current or potential homeowners significantly lower their monthly utility bills and incorporate the cost of energy efficient improvements into their mortgages.
Graduated Payment Mortgages are FHA loans for home buyers who currently have low to moderate incomes but expect them to increase substantially over the next 5 to 10 years.
FHA Section 245(a) allows those who currently have a limited income, but expect that their monthly earnings will increase, to purchase a home with the help of a Growing Equity Mortgage in which payments start small and increase gradually over time.
FHA condominium loans, sometimes called condo loans, are specifically designed toward those who purchase housing units in a condominium building.
Various loan options are available for those who prefer not to use the loans noted above. These alternatives include VA loans, conventional loans, jumbo fixed rate loans, among others.
SEE YOUR CREDIT SCORES From All 3 Bureaus
Sorting Out The Scores
Credit Requirements for FHA Loans
Good Credit History Makes it Easier to Qualify
FHA loans provide great assistance to many first time home buyers by offering mortgage loans with lower down payments. While this is a benefit for many people, recent changes in policy may have put the loans just out of reach for some would-be homeowners with questionable credit history.
Credit History and Score Requirements
For those interested in applying for an FHA loan, applicants are now required to have a minimum FICO score of 580 to qualify for the low down payment advantage, which is currently at around 3.5 percent.
If your credit score is below 580, however, you aren’t necessarily excluded from FHA loan eligibility. Applicants with lower credit scores will have to put down a 10 percent down payment if they want to qualify for a loan.
So if you’re planning to buy a house, and your credit score doesn’t meet the minimum, you should weigh the advantages and disadvantages of putting down a larger down payment or using those funds to try and improve your credit score first.
Benefits of an FHA Loan
The reason why FHA loans are so popular is because borrowers that use them are able to take advantage of benefits and protections unavailable with most traditional mortgage loans. Loans through the FHA are insured by the agency, so lenders are more lenient. Here are a few benefits you can enjoy with an FHA loan:
- Easier to Qualify
While most loans exclude applicants with questionable credit history and low credit scores, the FHA makes loans available with lower requirements so its easier for you to qualify.
- Competitive Interest Rates
You’ve heard the horror stories of subprime borrowers who couldn’t keep up with their mortgage interest rates. Well, FHA loans usually offer lower interest rates to help homeowners afford housing payments.
- Lower Fees
In addition to lower interest rates, you can also enjoy lower costs on other fees like closing costs, mortgage insurance and others.
- Bankruptcy / Foreclosure
Just because you’ve filed for bankruptcy or suffered a foreclosure in the past few years doesn’t mean you’re excluded from qualifying for an FHA loan. As long as you meet other requirements that satisfy the FHA, such as re-establishment of good credit, solid payment history, etc., you can still qualify.
- No Credit
The FHA usually requires two lines of credit for qualifying applicants. If you don’t have a sufficient credit history, you can try to qualify through a substitute form.
For many home buyers, using an FHA loan can really make the difference between owning your dream house comfortably or turning it into a financial nightmare. The FHA provides a wealth of benefits for applicants that qualify, so make sure you’re making full use of them.