November 6, 2017
Why do people prefer FHA loans? It’s a question many ask, especially when comparing loan options to conventional, VA, or other non-FHA mortgages. What’s the appeal of the FHA mortgage loan? Why should first-time home buyers consider this option?
FHA Loans Are Flexible
FHA home loans aren’t just for one type of home, or for one type of buyer. There is no income limit for an FHA mortgage, the borrower has to be able to afford the mortgage based on the borrower’s debt-to-income ratio (how much money you have coming in compared to the amount going out each month for financial obligations).
Credit ratings, employment, and other factors are also important, but the misconception that FHA mortgages are only for those who need financial help isn’t true. Any financially qualified applicant may apply for a loan-there’s no income dollar amount limit set on these loans.
FHA mortgage loans can be used for a variety of property, as long as the home has or will be affixed to a permanent foundation and meets FHA minimum standards, it may be considered for an FHA mortgage. That includes mobile homes, condos, town homes, manufactured or modular homes, mixed-used property that where at least half the floor space is residential in nature, etc.
FHA Down Payments Are Lower
Borrowers who qualify for maximum financing for FHA mortgages will be required to pay 3.5% down, as opposed to conventional mortgages which may require anywhere from 10% to 20% down depending on circumstances. Your down payment amount will be determined by several factors including the “adjusted value” of the home, your credit score, and other factors. There is no single down payment amount required since every transaction is different. The down payment is always a percentage of the adjusted value of the home.
FHA Loan Credit Score Requirements Are Lower (Lender Standards May Also Apply)
The FHA home loan FICO score standards listed in HUD 4000.1, the FHA loan handbook, state that FICO scores at 580 or better qualify for maximum financing. Borrowers with FICO scores between 500 and 579 would technically qualify but with a 10% down payment.
It is very important to understand that lender requirements may be higher in this area and lender standards will vary from place to place. You should discuss FICO score requirements with your loan officer for best results.
FHA Loan Interest Rates (Best Execution) Are Lower Than Conventional Mortgages
“Best execution” means situations where there is an “ideal” loan applicant with excellent FICO scores and other financial qualifications. Best execution FICO scores are lower for FHA mortgages. When you read mortgage loan interest rate reports you will notice this, but it is best to remember that your actual FHA loan interest rate will be:
- negotiated between you and the lender
- dependent on your FICO scores and other financial qualifications
- determined in part by market forces that affect the interest rate at application time
- subject to lender standards, state or federal law depending on circumstances
- subject to change until you make an interest rate lock commitment between you and the lender at the appropriate time-this will keep the interest rate you agreed upon “locked in” to protect you from rate fluctuations in the meantime.
Interest rate issues can be tricky if you aren’t familiar with how the process works. For best results, ask your lender how the interest rates for home loans are negotiated at that financial institution, what it will take to get an interest rate lock commitment and how long that rate lock is good for.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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