Top Five Benefits Of An FHA Mortgage

Whether buying a home or refinancing a current home loan, an FHA mortgage is one option you should consider. Why? Because there are significant benefits associated with an FHA mortgage, especially if your loan amount meets the FHA loan limit guidelines.

These are the top five benefits of an FHA mortgage;

Flexible Underwriting
Low Down Payment
Gift Funds Allowed
Low or No Credit Score
Streamline Refinance

Not many mortgage programs offer someone with a sub-700 credit score the option to put 3.5% down and still get a low rate; however, the FHA mortgage program does. Did you know that FHA mortgages also have the option for a debt-to-income ratio that is well above industry norms?

Below, I cover each benefit in detail so that you can decide if an FHA mortgage is right for you.

Flexible underwriting requirements

FHA mortgages have some of the most flexible underwriting requirements out of any loan program available today.

A debt-to-income ratio of 43% (or higher): Your total debts, which include the new mortgage, any installment debt, and revolving debt, can total up to 43% of your gross monthly income. In some cases, your debt-to-income ratio can go as high as 50%.
Job changes are okay: If you have changed jobs or your income has changed, you may still qualify as long as you can prove stability and consistency.
Previous foreclosure allowed: If you previously foreclosed on a home, you can still get a new home with the FHA mortgage program.¹ The waiting period is only three years versus the seven years most conventional loans require.
You do not need to pay off collection and charge-off accounts: This is a HUGE benefit to someone rebuilding their credit. The FHA mortgage program does not require you to pay off your collection and charge-off accounts.²
Low credit scores allowed: If you have a lower credit score (500 – 579), you may still secure an FHA loan.³ You need a 10% down payment rather than a 3.5% down payment. The other underwriting requirements remain the same.

FHA loans give buyers and homeowners with all credit types and qualifying factors a chance at fair and affordable housing programs.

Low down payment requirement

A lack of a down payment holds many potential homebuyers back. They figure they can’t buy a home if they don’t have 20% to put down. That’s not the case with FHA loans.

The FHA mortgage program allows for a 3.5% down payment in most cases.⁴ That means your Loan-To-Value ratio would be 96.5%. Some borrowers may even be able to use gift funds for the entire down payment (more on this below). This means no money out of your own pocket, but you can still buy a home.

Even with the low down payment requirements, FHA mortgages have flexible underwriting requirements that are easier than many other loan programs, most notably conventional loans.

FHA mortgage gift funds

Not many people know this, but the FHA mortgage program allows the use of gift funds for your down payment.⁵ In some cases, you can even use 100% gift funds for the down payment. It depends on your credit score.

Let’s say you’re buying a $400,000 home. To meet the basic down payment guidelines of 3.5%, you’d need a $ 14,000 down payment. If your parents (or another relative, like a sibling) or even a friend gave you a down payment gift of $14,000, you wouldn’t have to put any money down on the home.

It’s important to remember that this doesn’t include closing costs, so make sure you have enough saved for them.

Gift Funds With A Credit Score Below 580

If you have a credit score below 580, your down payment requirement is 10%. You may accept gift funds, but the lender might only allow up to 7.5% of the loan amount. The remaining 3.5% must be your funds. The lender will verify the funds are yours as this gives you ‘skin in the game,’ ensuring you make your payments on time. This makes up for the risk that your lower credit score creates.

Gift funds are just one of the many benefits of an FHA mortgage.

No credit scores are allowed

Most mortgage loans require a credit rating, not to mention a good credit score, but some borrowers can get an FHA loan with no credit score.

The FHA allows lenders to use alternative credit sources for borrowers without a credit history. This doesn’t mean you can use it instead of ‘bad credit.’ But if you don’t have established trade lines yet, lenders can use other sources, such as:

Rent
Utility payments
Insurance payments

Lenders can use any payment you can prove you’ve made consistently (on time) for the last 12 – 24 months to establish your credit history and make a lending decision.

No credit scores are one of the many benefits of an FHA mortgage. However, not all FHA mortgage lenders provide this option, so check with your Loan Officer if this program is available.

A streamlined refinance option is available

Many homeowners want to take advantage of the lower rates when mortgage rates drop. But refinancing requires going through the entire underwriting process again, which can be tiresome and difficult for some borrowers.

FHA borrowers can take advantage of the FHA Streamline Refinance program. If you currently have an FHA mortgage, you can refinance under the program by verifying only your mortgage payment history (on-time payments for 12 months) and that you have a “tangible net benefit” from refinancing.

FHA borrowers using the Streamline program don’t need to verify the following:

Credit score
Home Value
Employment/income

The FHA Streamline Refinance program is an easy option to refinance at a lower rate.

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Bottom line: FHA mortgages have big benefits

FHA mortgages are an excellent option for many borrowers. It’s clear to most that the benefits of an FHA mortgage are undeniable. Consider an FHA mortgage if you don’t qualify for conventional (standard) financing.

You don’t need perfect credit or a large down payment. You can buy a home and refinance it quickly if interest rates drop again. FHA mortgages allow everyone to become a homeowner or save as much money as possible on their loans.

If you don’t have perfect credit or a large down payment, consider FHA financing for your home purchase and make homeownership a reality sooner than you thought possible.

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