Benefits Of FHA Loans
An FHA loan can grant many borrowers the opportunity to become homeowners – especially those who have a somewhat low credit score and a reasonably high amount of debt. Known to be more forgiving and less restrictive than some other loan types, FHA loans present numerous benefits.
Below, we’ll delve a bit deeper into the advantages of taking out an FHA loan.
A Low Down Payment
One of the most attractive characteristics of an FHA loan is the low down payment requirement. Contrary to traditional beliefs surrounding down payment requirements, you don’t typically need to make a 20% down payment to achieve homeownership.
On an FHA loan, you can access financing for your home with only 3.5% down if you have a credit score of 580 or higher. If you have a score in the 500 – 579 range, the down payment requirement is 10% of the home’s purchase price.
Gift funds can also be used toward your down payment if you have a gift letter to adequately document the transfer of funds and gain approval during the underwriting process. You may also be able to participate in a down payment assistance program if you follow your lender’s verification and documentation process along with your state rules and regulations.
Leniency With Credit History
The same flexibility that FHA loans have with down payments applies to a borrower’s credit history. While most other loan types will require a minimum credit score of 620, you can qualify for an FHA loan with a credit score of 580 (for a 3.5% down payment).
Keep in mind that Rocket Mortgage® requires a minimum credit score of 580 for all FHA loans.
If you find a lender offering a loan to borrowers with a 500 qualifying FICO® Score, be aware that this is considered a subprime loan. As a result, you might be charged a higher interest rate and receive less favorable loan terms. If you’re worried about qualifying for an FHA loan with your current credit score, consider holding off on purchasing a home so you can work on improving your credit.
A Better Interest Rate
Mortgage interest rates are dynamic and affected by the state of the economy as a whole, but that doesn’t mean it’s impossible to bring your rate down. As it is, FHA loans typically offer better fixed interest rates than most other loan types. Adjustable-rate mortgages (ARMs) are also available.
Your interest rate will be determined in part by the broader market interest rate at the time you apply for your loan. Factors like your income, credit score, the amount you plan to borrow, your down payment and the loan term can also affect your mortgage rate.
Flexible DTI Requirements
Your debt-to-income ratio (DTI) compares your monthly debt payments to your income. To calculate your DTI, simply take your total monthly debt payments (including student loan, auto loan, credit card and mortgage payments) and divide this amount by your gross monthly income. The number you get will be your DTI expressed as a percentage.
FHA mortgages give borrowers more leniency with their DTI. According to the FHA, your DTI shouldn’t exceed 43% in certain situations. However, the DTI requirement for FHA loans may be higher or lower, depending on compensating factors like your credit score and cash on-hand.
With an FHA loan, you can also add a co-borrower’s income to give yourself a better chance of loan approval, even if that person won’t be residing in the home. Adding a non-occupant co- borrower, such as a family member or close friend, can give you even more financial flexibility.
