Federal Housing Administration (FHA) loans are mortgages insured by the government that allow homebuyers to qualify more easily. This type of mortgage is the government’s main strategy to promote homeownership throughout the nation, especially among those who have a harder time qualifying for other loan types. Although an FHA loan may not currently be the least expensive option, it may be the best; here are four reasons why.
- FHA loans are available to more homebuyers: Unlike FHA loans, most mortgage programs cater their services to a specific demographic. Fannie Mae’s HomeReady® program, for instance, offers USDA and VA home loans with zero down payment requirements—sounds like a great deal! These types of loans, however, are only offered to applicants who have served in the U.S. Armed Forces (VA loan) or live in a USDA-eligible area. Applicants must also fall within a specific income range, or reside in an under-served community. FHA loans, in turn, have neither income eligibility limits nor restrictions on geographic location. They are available to buyers in nearly every living situation!
- FHA lenders accept lower credit scores: Fannie Mae and Freddie Mac appeal to borrowers by promoting their acceptance of low credit scores—but this isn’t the case! Lenders actually impose higher minimums onto these program requirements, also known as a lender overlay. With an FHA loan, lenders are required to accept lower credit scores—even as low as 600! In fact, this year, nearly 24 percent of mortgage applicants had a score between 600 and 649, thus allowing potential buyers with credit mistakes to still have the ability to qualify.
- FHA mortgages permit a higher “DTI”: Your debt-to-income ratio (DTI) is calculated by comparing your debt payments to your before-tax income. Most conventional mortgage programs, including Fannie Mae and Freddie Mac, cap their DTI limit at 43 percent. Ellie Mae is even lower, with its highest accepted DTI at 34 percent. FHA loans appeal to a greater variety of buyers than these programs, as they permit a ratio of nearly 50 percent. For an approval at this rate, however, make sure you speak with your loan officer. You may need to present compensating factors, such as significant savings or a down payment higher than the minimum requirement.
- FHA loans support the purchase of rental properties: FHA loans are great for purchasing rental properties. Although the property must be a multi-unit (duplex, tri-plex, of fourplex), and you must live in one of the units, an FHA mortgage only requires a 3.5 percent down payment for this type of purchase. It is a very cost-effective way to gain some landlord experience, as well as to have your tenants pay for your mortgage!
Overall, FHA loans are great for buyers of any income level and location. If you’d like more information about FHA loans, or the mortgage process in general, please contact one of our mortgage lenders today!