If there’s a loan that many first-time homebuyers turn to, it’s FHA loans. In fact, this loan used to be strictly for first-time buyers. Today it’s a program that is meant for anyone, but certainly those that have never owned a home before can benefit.
Below are ten reasons it is one of the most popular programs.
Low Down Payment Requirement
If there’s one thing that is hard about buying a home, it’s the down payment. It can be hard to come up with 20% of the purchase price, even if the home is $100,000, you would need $20,000 down. That’s no small chunk change. The FHA loan only requires a 3.5% down payment which is a significant difference. On that $100,000 home, you would only need $3,500 down.
Low Credit Score Requirement
The FHA only requires a credit score of 580 for you to qualify for FHA financing. This requirement may vary by lender, though. The FHA allows scores that low, but many lenders add tougher restrictions to make sure you are a good risk. A little shopping around can find you a lender that allows a score this low though.
Along with the low credit score, the FHA allows a debt ratio up to 43%. This is higher than many other loan programs allow. This gives you a little more flexibility if you have several other debts outside of the new mortgage.
The FHA allows you to receive 100% of your down payment as a gift as long as you have a credit score over 619. If you have a credit score lower than 619, you will have to put 3.5% of your own money into the investment. If you can accept 100% of the down payment, though, that means you don’t have to come up with the money on your own.
The seller can help you with closing costs by giving you a credit at the closing. Many sellers offer this help called seller’s concessions. For example, if you are buying a $200,000 home, the seller could help you with up to $12,000 in closing costs.
FHA interest rates are often competitive with conventional interest rates. First-time homebuyers love the low-interest rates combined with the flexible underwriting guidelines, making it easier to obtain the financing that they need.
Use of Non-Traditional Credit
If you don’t have enough trade lines to make up a credit score, the FHA allows you to use non-traditional credit sources. This includes thing like insurance payments, rent, tuition, and utility payments. As long as you have a 12-month history of at least three payments like these, you can use it to help you qualify for the loan.
Allows Multi-Unit Properties
FHA loans are known as owner-occupied loans, but there is an exception. You can purchase a multi-unit property with an FHA loan as long as you occupy one of the units. You are then free to rent out the other units, using the rental income to help you pay your FHA mortgage.
Refinance with Very Little Verification
If you take a slightly higher interest rate than you want or you notice that interest rates drop after you close on your FHA loan, you can refinance with the streamline FHA loan. This loan only requires you to verify your loan payment history and that you benefit from the refinance. The lender doesn’t have to verify your income, assets, employment, or the value of your home.
Money to Fix Up a Home
The FHA 203(K) loan provides you with money to buy a home as well as fix it up. The FHA bases the loan amount on the ‘after improved’ value based on the renovations you plan to make to the home. You don’t need to worry about having more than one loan or qualifying for a home equity loan.