May 7, 2021
There are so many advantages of an FHA loan. With their flexible lending guidelines, you can have a lower FICO® score and a lower down payment. But besides those two reasons, there are many others most borrowers aren't aware of. From credit advantages to saving money, read on to see if an FHA loan could be the answer, you've been looking for.
1. Easier Credit Qualifications
Many borrowers have this type of government loan because the credit qualifications are less strict than for a conventional loan. It's one of the easiest loans to qualify for, especially if you have less than perfect credit.
Keep in mind, if a borrower has a credit score of less than 650, the FHA interest rate will almost always be lower when compared to a conventional interest rate.
What is the minimum score for an FHA loan?
The FHA only requires a score of 500. Although some lenders will go down to 580, most require a score of 620 or higher, especially since COVID.
FHA Allows Compensating Factors
To strengthen their application, the FHA lets the borrower submit proof of compensating factors to prove their creditworthiness. These include:
- Verified cash reserves
- Minimal housing payment increase
- Low debts
- Residual income
- Substantial non-taxable income
- Increased earning potential
2. Shorter Time After Negative Credit
Past bankruptcies and foreclosures can make getting a mortgage more challenging. With FHA, you don't have to wait as long to get a mortgage after you've had a major credit event. Let's compare the waiting period of the FHA and conventional loans.
Chapter 7 bankruptcy waiting period:
- FHA: 2 years since discharge
- Conventional: 4 years since discharge
Foreclosure waiting period:
- FHA: 3 years
- Conventional: 7 years
As long as you meet the FHA guidelines, it's still possible to get a mortgage. That's because overall, the guidelines that Fannie Mae and Freddie Mac follow are much tougher than FHA's as far as credit. If you have questions about your specific credit situation, ask your mortgage lender.
3. Low FHA Loan Down Payment
The FHA low down payment mortgage is a favorite of both first-time homebuyers and cash-strapped shoppers. If you don't have money for a down payment, it's acceptable to get help.
A family member can give you money to cover your down payment. So can other relatives, an employer, a very close friend, a charitable organization, or a government agency that offers down payment assistance.
To get the best conventional rates, lenders prefer 20% down — although there are programs as low as 3% down. Compare the low 3.5% FHA down payment to a conventional loan and see the interest rates for yourself.
4. More Lenient on Gift Funds
The FHA's rules on gift funds are not as strict as conventional guidelines. Let's compare.
- Conventional loans accept gift funds from relatives. These include anyone related by blood, a spouse, domestic partner, or fiancé.
- The FHA guidelines are more lenient. Gift funds can come from family, close friends, an employer, a union, or government down-payment assistance programs.
5. Some Closing Costs Can be Financed
Closing costs can average around 3-5% of the loan amount. Some of them can be rolled into your loan. One of the ways to cover these costs is with lender credits. Here's how it works: the borrower pays a little higher interest, and the lender gives them a credit that helps cover their closing costs. That's helpful for those borrowers who want to spend as little out of their pocket as possible.
If you'd like some of the closing costs financed, let your loan officer know, and they can work out the numbers for you.
6. Seller Paid Closing Costs Save Borrower
Here's even more money-saving news! Sellers can pay up to 6% of the sales price towards some of the borrowers' closing costs. These costs include:
- Property taxes
- Escrow fees
- Homeowners insurance
- Title insurance
- Lender fees
As you can see, there are quite a few fees, and the costs can add up. Negotiating to have the seller pay for some of these can help cash-strapped borrowers get into their new homes.
7. More Affordable Mortgage Insurance
Mortgage insurance can get a bad name unjustly. Yes, it increases your mortgage payment. But it also helps you get into a home.
Keep in mind — the FHA doesn't issue loans or loan money themselves. Instead, they offer lenders mortgage insurance. This insurance protects the lender from default and makes them more willing to approve loans and lend money. Without this insurance, there wouldn't be as many proud homeowners all across the country. Amazingly enough, the FHA has issued more than 8 million single-family mortgages.
And even though you may not like paying for insurance, you have to consider the stability that homeownership provides. Plus, you have an appreciating asset.
Conventional loans have mortgage insurance, too, if your down payment is less than 20%. But if your credit score is under 680, that mortgage insurance can be pretty expensive. So, it's always important to compare what you can get with an FHA vs. a conventional loan.
8. Higher Debt-to-Income Ratio (DTI)
The debt-to-income ratio is the difference between your debt as compared to your income. The standard highest DTI the FHA allows is 43%, although you may be able to go higher if you have compensating factors.
Here's an example:
If your income is $4,500 a month, your monthly debts can't exceed $1,935. That amount includes your mortgage payment (principal, interest, taxes, and insurances), credit card minimum payments, auto, and installment loans.
9. Non-occupant Co-borrowers Are OK
With an FHA home loan, a borrower can be on the loan even though they're not going to live in the property. That's called a non-occupant co-borrower. This arrangement works well if the primary borrower can't qualify because they don't have enough income.
So, a parent can help their child buy a home even if they live across the country. The underwriter will take the co-borrower's income into account. A child can also help a parent or other sibling.
Here's what the FHA says about who can be a co-borrower:
- Borrowers related by blood, marriage, or law, such as spouses, parents/children, siblings, stepchildren, aunts/uncles, and nieces/nephews
- Unrelated individuals who can document evidence of a longstanding, substantial family-type relationship not arising out of the loan transaction
10. Low-Interest Rates
As we discussed above, FHA rates are some of the lowest there are. And compared to conventional rates, borrowers with a credit score of less than 680 will almost always see lower FHA rates. When comparing, consider principal, interest, and mortgage insurance. And keep in mind that FHA's mortgage insurance premium remains for the life of the loan. Whereas with a conventional loan, you can ask the lender to remove the PMI once you have 20% equity.
As you can see from these ten advantages, the Federal Housing Administration wants to make homeownership available to as many borrowers as possible.
To learn more about PenFed loans or what loan is right for you:
- Call 866-386-7254
- Visit the Mortgage Center