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Benefits of an FHA Mortgage

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An FHA mortgage has many advantages, whether you're a first time homebuyer or if you've purchased properties in the past. And there are more benefits than the low down payment and attractive interest rates. Let's dig in a bit to see what these benefits are and how you can take advantage of them to purchase a property. 

Main Benefits of an FHA Loan

  • As low as 3.5% down payment
  • Credit scores as low as 500
  • Debt to income ratio of 43%
  • Financing available for 1-4 unit properties

Unique Benefits You Might Not Know About

Get Into an FHA Loan With No Money Out of Your Pocket

Believe it or not, there are ways for borrowers to get into an FHA loan without spending any of their own money. It takes coordination between the borrower, lender, seller, and realtors, but it can be done.

This might not work in a seller's market where there are multiple offers. But in a buyer's market where sellers are willing to go the extra mile to sell their home, this could be possible. Read on to see how.

Down Payment From Other Sources

The most well-known FHA down payment amount is 3.5%, as long as your credit score is 600. Let's look at some examples of how much a 3.5% down payment would be:

  • For a $200,000 condo: $5,000 down payment
  • For a $250,000 townhome: $8,750 down payment
  • For a $300,000 single-family home: $10,500 down payment

For each of those examples, you can get some help with your down payment. It can be a gift from your mom and dad, a relative, your employer, and even a charitable organization. But it must indeed be a gift. There can't be any expected re-payment.

Once you have someone or an organization ready to gift you your down payment money, you'll need to document it in a gift letter. Your loan officer can show you an example of a gift letter.

Low Closing Costs

Besides having limits on closing costs, here are two ways to get help covering these costs.  Here's how.

  • Lender Credits: If you're willing to take a higher interest rate, the lender will pay for part of your closing costs.
  • Closing Cost Assistance : Almost every city and county across the country have low-income down payment assistance. And for some borrowers, this can be very helpful. But not all lenders work with closing cost assistance programs. Plus, these programs can complicate the process and make the loan take much longer. It's just good to know there are options out there.

If you're wondering if an FHA loan covers closing costs — the answer is no, not directly. But there are ways to get these costs covered, as discussed above.

Credit Issues

There's no denying it, the FHA wants to help borrowers get into a home. That's why they are much more lenient on credit issues than conventional loans. Here are some examples:

  FHA Conventional
Chapter 7 bankruptcy waiting period 2 years since discharge 4 years since discharge
Foreclosure waiting period 3 years 7 years

Borrowers with significant credit events in the past have a better chance of getting an FHA loan sooner.

FHA Financing for Multi-Unit Properties — Experienced Landlords Only

Did you know that FHA loans aren't just for one-unit properties? That's right. Eligible borrowers can purchase two-unit properties (duplex), three-unit properties (tri-plex), and four-unit properties (four-plex).

But you must live in one of the units as your primary residence. The advantage of this is that you can rent the other units out to help cover the mortgage. One of the main criteria a lender will look at is if you have experience as a landlord. If you don't, this option may not work. Each case is looked at on an individual basis.

For an FHA loan to work for a multifamily property, the borrower must show that they can afford the payment. To do that, they may need rental income as part of their income.

It's worth checking out the possibility of FHA multifamily financing if you have experience in rental property.

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