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An FHA loan is a mortgage issued by FHA-approved lender and insured by the Federal Housing Administration (FHA). Designed for low-to-moderate-income borrowers, which require a lower minimum down payments and credit scores.
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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.
Some lenders may consider lower credit scores with additional conditions. Ask about current FHA and lender requirements before assuming eligibility.
FHA loans may offer a lower down payment to eligible buyers, depending on credit and lender requirements. Approved, documented gift funds may help with the down payment under program rules; closing costs and mortgage insurance also apply.
Borrowers with lower credit scores may need a larger down payment or may not qualify. Request current terms and an individualized estimate before deciding.
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, and automated underwriting can approve ratios up to 50 percent with strong compensating factors. 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 flexible debt ratios (up to 43 percent standard, or higher with automated underwriting).
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.
