You may have heard about FHA home loans, but you probably aren't exactly sure what they are. If you are curious, check out these five FHA loan facts, so you can decide if an FHA loan may be a good option for you.
You Don't Need a Down Payment of 20 Percent
Many people believe that to buy a house, you have to pay a down payment of 20 percent, but that isn't really the case. The confusion, however, is understandable because a down payment of 20 percent is necessary if you want to avoid paying mortgage insurance. Mortgage insurance is simply protection for the lender, so that if the owner fails to repay the loan, the lender still gets repaid. Even conventional loans usually only require between 5 and 10 percent, depending on how much the home is worth. FHA loans, however, only usually require 3.5 percent.
You May Be Able to Avoid a Down Payment
In some cases, a down payment can be gifted to you via equity. Equity can only be gifted to you if you are purchasing the home from a family member (blood, marriage or law) or a proven family-type member. To calculate equity, subtract what is still owed (mortgage, liens, etc.) from the market value. Whatever is left is how much equity is in the home. To use this equity as the down payment, the home owner sells the house to you for less than the market value. The equity is transferred to you and works as your down payment as long as there is enough equity in the home to cover the down payment.
FHA Loans Are Also Great for People With Low Credit.
While FHA loans are a great option if you don't have a big enough down payment for a conventional loan, that's not the only reason you should consider an FHA loan. FHA loans are also beneficial if you have low credit. Typically, you need a credit score of at least 500 to qualify for an FHA loan, but if your score is less than 580, you may need to pay a bigger down payment than 3.5 percent. Usually, as long as your credit score is at least 580, you'll only have to pay the 3.5 percent down payment.
Buyers With a High Debt-to-Income Ratio Should Also Consider an FHA Loan
FHA loans are also a good option if you have a lot of debt compared to your income. The debit-to-income ratio helps lenders determine if you are going to be able to repay the loan or if you already have too much debt. The lender will consider your front-end and back-end ratio. Front-end ratio only considers the costs of owning the house, while the back-end ratio considers all your other debt. For conventional loans, you'll want to see your ratios fall around 28 and 36 percent respectively, but FHA loans usually require around 31 to 43 percent.
Not Everyone Can Qualify
FHA loans are very flexible, allowing people who won't qualify for a conventional loan to still buy a home. However, they aren't so flexible that anyone will qualify. While you don't have to have perfect credit, you do need to have a score of at least 500. On top of that, you need at least two lines of credit history. Plus, you'll want credit history that looks good. This means you don't have a bunch of late payments or a previous foreclosure. If you filed for Chapter 7 Bankruptcy, at least two years must have passed, and if you filed for Chapter 13 but are still repaying, you may still be considered.
Getting a home loan can be difficult, but FHA loans are a simpler way for many people who qualify. If you have been denied a conventional loan, it's time to consider an FHA loan. For more information about FHA loans, contact a lender in your area today. You can also talk to a real estate agent like Aaron Lillie - Real Estate Sales Representative for more information.
Hi, my name is Jessica Williams. Thanks for stopping by my website. I have moved a number of times and in three cases I have had to sell a house. The first time I sold a house I listed it with a real estate agent. The second time I did it myself. The third time I listed with a realtor. You can probably ascertain from this information that I found listing with an agent the better route. I managed to sell my house by owner that one time, but never again. There is too much involved and too great a risk for errors. There’s a bunch of paperwork and preparation that goes into selling a house, more then I imagined. My goal here is to share my experiences with you. My hope is to make your experience as pleasant as possible.