FHA loans are government insured home loans. They are backed by the Federal Housing Administration. As a result, lenders are protected from a loss if you can't pay your mortgage. Thus, they are often easier to qualify for than conventional loans. If you think you can't get a conventional home loan, check out if you should consider an FHA loan.
People Who Can't Afford a Down Payment
When you apply for a conventional home loan, you'll need to put down a 20 percent down payment (20 percent of the total cost of the house) if you don't want to pay mortgage insurance. For low-income families or for families who are just starting out, this can be difficult to obtain. FHA loans, however, only require a down payment of 3.5 percent. In some cases, with an FHA loan, you may even be eligible for a zero down payment through Veterans Affairs or the Department of Agriculture, but there are strict guidelines you must meet to qualify.
People With Bad Credit
You may think that just because your credit isn't stellar, you can't get a home loan, but FHA loans are a little less strict when it comes to credit scores. Even if you have a credit score that is 620, which is considered fair, you still have low credit, which can make getting a conventional loan difficult. With an FHA loan, your credit will still be pulled and examined, so it's important that you have a good history of paying bills on time. If you do have low credit and qualify for an FHA loan, you may need to put down a larger down payment than the standard 3.5 percent.
People Who Have a High Debt-to-Income Ratio
Debt-to-income ratio or DTI ratio is a way lenders determine if you can even afford a loan. The lender will determine your front-end ratio and your back-end ratio. The front-end ratio takes all the costs associated with owning the home, such as mortgage, taxes, etc., and divides it by your monthly gross income. The back-end ratio is determined by calculating all your total debt and dividing it by your monthly gross income. Different lenders have different requirements for these numbers, but you usually want to see them around 28 percent and 36 percent. FHA limits, however, are higher than most conventional loans, sitting at 31 percent and 43 percent.
People Who Need an Extended Loan Size
Depending on where you live, there is a maximum home loan amount. In the contiguous states, the loan limit for one unit is $417,000. Of course, you may find and be able to afford a house that costs significantly more. If you need a home loan for more than that your area's maximum, you can't get a conventional loan. With an FHA loan, however, you may be able to qualify for a higher loan. Again, the FHA limitations depend on where you live. Typically, the more expensive the area (New York City, California, etc.), the higher the FHA limitations.
People Who Want a Low Interest Rate
A great benefit of FHA loans is that they can have lower interest rates than conventional loans. This is also why many people choose to refinance their current conventional home loans that have high interest rates with an FHA loan. Just make sure you calculate to determine if the lower interest rate is worth paying mortgage insurance.
FHA loans allow many people to buy homes who wouldn't qualify for a conventional home loan. If you meet any one of these descriptions, you should consider an FHA home loan. Contact a lender in your area today to find out more and start calculating how much you can afford.