FHA loans have various benefits for both first-time homebuyers and subsequent homebuyers. If you have less than perfect credit, or a high debt-to-income ratio, it’s a good alternative to conventional loan financing. Check out the FHA loan benefits below.
Hands down, FHA loans have the most flexible credit score guidelines. With a minimum credit score of 580, FHA loans offer loans for credit scores 50 points lower than conventional and even USDA loans.
You may even secure a loan with a credit score as low as 500, but with a higher down payment. No other loan program allows credit scores as low as 500, making the FHA loan a great option if you have fair credit.
FHA loans only require 3.5 percent of the sales price down on a home. On a $200,000 home that’s just $7,000. If you have at least a 619 credit score, 100 percent of your down payment can be a gift from a family member, employer or charitable organization as long as you document the gift funds according to the FHA and lender guidelines.
If your credit score falls between 500 – 579, you must make a 10 percent down payment. Of that amount, 3.5 percent must be your own contribution and the remaining 7.5 percent may be gift funds.
Many loan programs restrict your debt-to-income ratio, as this determines how well you can afford the loan. The FHA loan program allows DTIs as high as 43 percent for your total debt ratio. This makes it easier for more people to secure a mortgage whether they have a large amount of other existing debt or low income.
The relaxed debt-to-income ratio guidelines are possible because of the FHA mortgage insurance borrowers pay. While mortgage insurance increases a borrower’s payment, the higher DTI allowances make it easier to qualify even with existing debt.
Refinancing is easy for FHA loan holders. Taking advantage of lower interest rates or a better term is easy with the streamline refinance option. You verify very little of your personal qualifications. Lenders don’t check your credit, home value, or income/employment if you already have an FHA loan and benefit from a refinance.
If you need more than a lower interest rate and want to tap into your home’s equity, the FHA has a cash-out refinance option. It has the same flexible guidelines as its standard purchase loan including a 580 credit score minimum and 43 percent maximum total debt ratio.
Like most loans, the FHA cash-out refinance allows you to tap into up to 80 percent of the home’s value. Leaving that 20 percent behind helps the lender if you default.Purchase Qualifier Refinance Rate Checker