It’s a fairly safe bet that if the discussion turns to home loans for first-time buyers, FHA loans will be mentioned. In fact, the association is strong enough that some people mistakenly believe that the FHA’s loan program is only for novice buyers. In reality, the FHA loan program is used by a wide array of buyers because the many benefits of an FHA loan make this form of financing an appealing option for people from all walks of life.
Exploring the Benefits of an FHA Loan
What is an FHA loan? As Investopedia explains, it’s a mortgage loan from a program designed to support low- and moderate-income Americans in their efforts to become homeowners. These loans are issued by a private lender and guaranteed by the Federal Housing Administration (FHA). That government backing helps to lower the risk that a lender takes in extending a loan, which allows the lender to agree to terms that are more favorable than the borrower might otherwise offer.
What are the benefits of an FHA loan?
1. Low Down Payments
Have you ever wondered why lenders like to see sizeable down payments? Putting money into a property from the very beginning is seen as a sign of commitment because it increases the stakes, but coming up with a down payment is tough for many aspiring homeowners. Fortunately, the FHA loan program provides a great advantage to qualifying borrowers, requiring a down payment of just 3.5 percent. According to HousingWire, this low down payment makes it easier for people to buy a home and helps many Americans buy a home sooner rather than later.
2. Lower Credit Score Requirements
Your credit score is a three-digit summary of your creditworthiness, and it’s a major factor whenever you’re applying for a loan. As The Balance reports, prospective borrowers hoping to score a conventional loan generally need to have a credit score of 620 or more. For the multitude of borrowers with less-than-stellar credit scores, an FHA loan is more attainable. Borrowers will need a credit score of at least 580 to get by with a 3.5-percent down payment. However, borrowers with credit scores as low as 500 might still be able to snag an FHA loan if they can make a down payment of 10 percent or more.
In addition to achievable credit score standards, lenders reviewing FHA loan applications tend to be more generous when considering other financial factors, like income and debt-to-income rations.
FHA loans are intended to fund the purchase of a primary residence, but as Business Insider reports, that still leaves you a lot of leeway when selecting a property. You could opt for a single-family home. You could purchase a multi-unit property with up to four units and live in one of them. You can even find FHA loans for manufactured housing and mobile homes.
FHA loans are assumable. According to Zillow, that’s an advantage you’ll want to keep in mind, especially if you plan to sell the home in a few years. With an assumable mortgage, a qualifying buyer can take over the existing mortgage instead of having to go out and get a new mortgage. Since mortgage rates and payments are often lower on older mortgages, assumability can be a major selling point.
Requirements for an FHA Loan
What does it take to qualify for an FHA loan? Zillow offers a brief look at the basic requirements for this form of financing:
- A borrower must be of legal age to sign for a mortgage, have a Social Security number, and be a lawful resident.
- A borrower must have a steady work history and an appropriate level of income.
- A borrower needs a credit score of at least 500.
- A borrower needs to have a debt-to-income ratio of no more than 50 percent.
- A borrower must be ready to make a down payment of at least 3.5 percent.
- A borrower must choose a property that meets the FHA’s minimum standards and plan to use it as their primary residence.
Are you interested in learning more about the benefits of an FHA loan? Do you want to explore other loan products? Contact PrimeLending Twin Cities today to get started on your journey to homeownership.