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Easiest Mortgage Loan To Qualify For
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FHA loans are government-backed mortgages with flexible eligibility requirements, making them popular with first-time homebuyers and returning homebuyers whose credit history has improved. If you have limited down payment savings and a low credit score, it may be easier for you to get approved for an FHA loan than a traditional loan.
Still, the easier approval guidelines for FHA loans have some additional costs and rules that are worth knowing before deciding it's the best fit for you.
FHA loans are home loans insured by the Federal Housing Administration (FHA), a government agency that follows lending rules set by the US Department of Housing and Urban Development (HUD). You pay two types of mortgage insurance to protect FHA-approved lenders from losses if you stop making mortgage payments.
You don't have to be a first-time home buyer to get an FHA loan, but you must have lived in the home you plan to buy for at least one year. Unlike many other first time home buyer programs, there are no income limits. This provides an additional mortgage option for high income earners if they do not meet the minimum credit score of 620 required for traditional loans.
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The FHA was created in 1934 to provide better financing options for US renters to purchase homes. A 50% down payment was common at the time. That meant earning enough to pay off the mortgage in three to five years.
Over time, FHA loan program guidelines allowed borrowers to pay down payments as low as 3.5% and pay off their loans over 30 years. Lenders were willing to risk making FHA loans for mortgage insurance premiums paid by borrowers to protect them from financial losses in the event of a mortgage default.
Basically, FHA loans work like any other mortgage program. You must qualify based on your income, credit history, employment history, and ensure you have funds for your down payment and closing costs. However, the minimum mortgage requirements are very different to other loan programs.
An upfront payment including a down payment is required to take advantage of an FHA loan. The minimum required depends on your credit score.
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Fortunately, you don't have to save your own down payment. Get gifts from friends and family, check out Down Payment Assistance (DPA) programs in your area, and even sell assets like cars to make money.
There is no qualifying income limit, so you don't have to worry about making a lot of money to get an FHA loan. Most of the traditional 3% down payment programs offered by Fannie Mae and Freddie Mac are limited to low to moderate income home buyers.
A history of stable income documented on the last two years of payslips and W-2 is required. If there are large gaps in your work history, they should be explained.
Home buyers often choose FHA loans if their credit history has been sketchy. The standard credit score benchmark for traditional loans is 620, but FHA guidelines set a lower minimum score requirement.
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Borrowers who experience a major credit event such as bankruptcy or foreclosure also get a break compared to stricter traditional lending guidelines.
FHA regulations require lenders to verify government-sponsored loans are delinquent using the Credit Alert Interactive Verification Reporting System (CAIVRS). Federal student loans, Small Business Administration (SBA) loans, or previous VA or USDA loan defaults can prevent FHA loan approval.
Borrowers divide their total debt by their pre-tax income as proof of their ability to pay their mortgage. In lender terminology, this is called the debt-to-income (DTI) ratio, and FHA guidelines set the desired DTI ratio at 43%. With a strong credit score and additional cash reserves, you can qualify for a DTI ratio of over 50%.
If you have a high DTI ratio or a low credit score, you may need backup for your mortgage. This is the money set aside to pay the minimum monthly mortgage payment. If you are buying a multi-unit property, you will need a reserve if you are using rent from other units to qualify for the loan.
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The FHA insures all mortgages closed by an FHA-approved lender with an upfront payment and an annual mortgage insurance premium. Unlike homeowners insurance, mortgage insurance only covers the lender's costs if you can't make your monthly payments and the lender has to foreclose on your home.
A higher down payment, shorter loan term, or smaller mortgage can reduce the percentage of FHA insurance you pay each month. Use the FHA Mortgage Calculator to try different options and see how they affect your monthly payments. Alternatively, ask your loan officer to provide loan quotes with different variations.
Each year, the FHA sets new limits on the maximum loan that can be taken out, based on percentages of the loan limits set by the Federal Housing Finance Agency (FHFA). FHA loan limits vary depending on the county you live in and can be higher in more expensive areas of the country. It also gives you more borrowing power if you are buying a 2-4 unit home.
You can check the FHA Mortgage Limits website to see the current limits in your area. The table below shows the low cost and high cost area limits for this year
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If the FHA loan limits do not give you enough money to buy, we recommend that you check the relevant loan limits in your area. For example, in most of the country, the traditional single unit loan limit is $647,200, which is $226,520 more than the FHA limit for single-family homes to purchase a home.
Only FHA approved lenders can offer FHA loan rates. This is especially important when shopping because not all mortgage companies offer FHA loans. Like any mortgage interest rate, the higher your credit score, the higher the interest rate.
Always try to improve your credit before applying for an FHA loan. Any of the following can help boost your credit score and get you a lower rate:
You can expect to pay between 2% and 6% of the loan amount for FHA closing costs. Beyond mortgage insurance, there are some aspects of closing costs that are unique to FHA loans.
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FHA offers a variety of loan programs to meet the needs of homebuyers and homeowners throughout their financial lives.
Most home buyers choose a "standard" FHA loan to purchase a home. Also known as the 203(b) program, this type of FHA loan comes with all the down payment and credit score flexibility discussed above.
Home buyers do not want to pay more than the home is worth. The FHA will ensure an exit strategy in the form of an FHA Amendment. This is required when buying a home with an FHA loan, and if the price does not match the sales price, you can cancel the contract and receive a deposit up front.
You can replace your existing loan with a new FHA loan of up to 97.75% of the value of your home. A minimum score of 580 is required and FHA closing costs can be incorporated into the loan amount. This is more commonly known as "rate and term" refinancing.
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Homeowners who currently have an FHA loan may be eligible to pay less with an FHA simple refinance. Eliminating income documentation and the absence of a home appraisal greatly simplifies the process.
Borrowers with a credit score of around 500 can borrow more than they currently owe and pocket the difference with an FHA Cash Out refinance. However, you cannot rent more than 80% of the home's value with this option.
The 203(k) Mortgage Program allows you to purchase or refinance a home and consolidate renovation costs into one loan. You can choose a limited program for smaller projects (under $35,000), while our Standard program offers more cash for larger projects.
HECM loans, also known as reverse mortgages, offer borrowers over the age of 62 several ways to convert their home equity into cash and avoid monthly payments. To qualify, borrowers must normally own at least 50% of the shares.
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