About the FHA Loan
The FHA is the Federal Housing Administration. The FHA loan is a mortgage loan insured by the FHA. FHA loans allow down payments of 3.5%. For comparison, traditional bank home loans require a 20% down payment. This is why FHA loans are extremely popular. Also, FHA loans require a lower credit score to be approved for a loan. You must have at least a 580 credit score to qualify for an FHA loan.
FHA loans were birthed from the housing market crash in the 1930s. There were tons of foreclosures during this time period. The FHA loan was designed to help stimulate and revive the housing market.
First time home buyers usually opt for an FHA loan because of the convenient pre-requisites. Although FHA loans have lower requirements, it comes with a stipulation. You must pay mortgage insurance. The purpose of the mortgage insurance is for added protection in case you default on your loan. The mortgage insurance protects the lender.
What if I have a credit score lower than 580, can I still qualify?
Yes, but you will have to put down a larger down payment. FHA accepts borrowers with credit scores in the tier of 500-579, but you must put down a 10% down payment opposed to 3.5%. Usually, borrowers with lower credit scores are required to pay higher interest rates.
What else do I need to qualify for an FHA loan?
In addition to a 3.5% down payment and a 580 credit score, you also need to be of legal age and have a valid social security number. Steady employment is a requirement. Lenders usually want you to be working for the same employer for at least two years. FHA loans must be used for primary residence occupancy. This means you cannot use an FHA loan for an income-producing property like a rental or AIRBNB.
Lenders want to make sure that your mortgage payment, mortgage insurance, HOA fees, and property taxes do not add to more than 31% of your gross income. If this ratio is significantly higher than 31% you are considered a risky borrower. Also, your debt-to-income ratio must be less than 43%. This means that your monthly bills including credit card payments, student loans, etc. should be less than 43% of your income.
What if I filed for bankruptcy, can I apply for an FHA loan?
Most of the time, FHA loans require that you are two years post-bankruptcy. Also, you should have a proven track record of re-establishing good credit and good credit habits. If you are one-year post-bankruptcy, it is hard to qualify for an FHA loan, but not impossible. This decision is made on a case-by-case basis.
What are the interest rates of FHA loans?
Interest rates will vary based on your loan. If you have a 30-year fixed FHA loan you can expect to pay around a 4.02% rate. If you have a 20-year fixed FHA loan, you can expect to pay around a 3.38% interest rate. If you are a part of the 15-year fixed FHA loan program, you can expect to pay around 3.52%.
How do I apply for an FHA loan?
You apply for FHA loans through FHA lenders. You can apply for FHA loans through the Space Coast Credit Union. An SCCU FHA home loan will walk you through the mortgage process. If you are just thinking about buying a home, actively looking for a home, or if you have found your dream home, you can apply for an SCCU FHA home loan.