Many Americans dream of home ownership and wonder how they can make that dream a reality. Stories of strict credit rules, high down payments, and steep closing costs have kept many deserving people from inquiring about mortgage loans. Fortunately, the Federal Housing Administration (FHA) makes getting a mortgage manageable with lenient credit requirements, low down payments, and low closing costs. The FHA also works with people who have filed for bankruptcy or foreclosure. With an FHA loan, home ownership can become a reality.
After the 2008 crisis, many lenders tightened their belts. As a result, buyers with credit scores in the 600s and even the 700s found themselves getting turned down over minor slipups. As the housing market has thawed — and in some areas, caught fire — lenders have loosened up a little, but if your credit score is below 600, you still might not have much luck with a conventional bank or lender.
An FHA loan can make home ownership possible even if you have imperfect credit. A 580 score could get you in your own home with a down payment as low as 3.5 percent. If you’re willing and able to put 10 percent down, you could get approved for an FHA loan with a credit score as low as 500.
Even if you have good credit, you still may be concerned about coming up with the money for a down payment. Many conventional lenders still require you to put 20 percent down. With an FHA loan, though, you can become a homeowner with a much smaller down payment. Most FHA mortgages require only 3.5 percent down. A lower credit score could necessitate a higher down payment, such as 10 percent, but that’s still only half of what conventional lenders require.
With an FHA loan, your down payment will be low and so might your closing costs. Though closing costs for FHA loans aren’t actually lower than they are for conventional mortgages, the amount that “interested parties” can pay on your behalf is much higher. Interested parties are people like the seller and the real estate agent. Often a motivated seller will offer to pay some or all your closing costs to get the deal done.
Under conventional loan rules, interested parties can pay up to 3 percent of the loan amount on your behalf. The only way they can pay more is if you put more than 10 percent down. Let’s say you’re buying a home for $250,000, with a down payment under 10 percent. With a conventional loan, the seller can pay up to $7,500 of your closing costs. If your costs are more than that, they might have to come out of pocket.
With an FHA loan, interested parties can pay 6 percent of the loan amount. So for the same loan, the seller can chip in up to $15,000. That should be more than enough to cover the closing costs on a $250,000 home purchase, which means if you have a motivated seller or real estate agent and you get an FHA loan, you might have little or even zero closing costs.
Another common roadblock on the path to becoming a homeowner is a recent bankruptcy or foreclosure. Conventional lenders can be very unforgiving when it comes to these items, but the FHA will work with you.
If you filed a Chapter 7 bankruptcy, conventional lenders require a waiting period of four years from the discharge or dismissal date. For a Chapter 13, it’s two years from discharge or four years from dismissal. When it comes to foreclosures, the rules are even stricter. Unless you can prove you lost your home due to extreme circumstances, you’re barred from getting a conventional mortgage for seven years.
The FHA can get you into a new home much faster. You can get approved for a loan two years after the discharge of a Chapter 7. With a Chapter 13, you might qualify for a mortgage even if you’re still in bankruptcy. The requirements are that you have been paying on it for a year and have made every payment on time. If you had a home and lost it to foreclosure, the FHA requires you to wait only three years to get another loan.
While bad credit may be a concern for some, others wonder if they can get a mortgage with little to no credit history. According to FHA’s own rulebook, the program can’t turn you down for not having a credit history.
Your lender can obtain a non-traditional credit report to ensure you pay your bills. It includes things like rent, utilities, and car insurance. If you have a track record of making these payments on time, an FHA lender can use it to approve your loan.
You deserve to be a homeowner, even if you don’t have a perfect credit history or thousands of dollars to put down. With an FHA loan from Partners Mortgage, your dream of home ownership could soon be a reality.