FHA loans are some of the most buyer-friendly mortgage options available. But like all loan products, there are certain types of buyers who will find these mortgages most attractive.
Here are eight buyers who should consider an FHA loan for their next purchase…
Top 8 Types of Homebuyers Who Should Use an FHA Loan
1. Buyers with a Low Downpayment
FHA loans are extremely attractive to buyers who don’t have a large downpayment. While the specific downpayment requirements will depend on the lender (lenders can add additional requirements if they choose), to get the support of an FHA loan lenders can actually write loans with as little as 3.5% down.
FHA loan downpayment requirements are on a tiered system based on credit scores. Essentially, if you have a score of 580 or higher, you may be able to qualify for a loan with a 3.5% downpayment. If your score is below 580, you may need as much as 10% down, which is fairly typical for most loan products.
Just how much does that mean in upfront costs? 3.5% equals $3,500 for every $100,000 in purchase price; 10% means $10,000 for every $100,000. So if you are buying a home for $500,000, a 3.5% downpayment is equal to $17,000. At 10%, you would need $50,000 for the purchase.
If you do not have a large amount in savings and have a decent credit score, an FHA loan could be perfect.
2. Buyers with a Low Credit Score
Credit scores vary by lender and by the specific loan product, but FHA loans are often a good option for borrowers with less-than-stellar credit. If you have at least a 500 credit score, you will qualify for the base-level requirements of an FHA loan.
According to Experian, a 500 credit score is considered “poor.” (Anything between 300 and 579 is “poor” credit.) This means that you could consider an FHA loan a “poor credit” loan option.
3. First Time Homebuyers
Because of the low downpayment option, as well as the chance to purchase with low credit, FHA loans are often a great choice for first-time buyers.
Of course, everyone’s situation is different, but first time buyers often have little savings that they can throw towards a downpayment; they certainly don’t have equity in another property that they can put towards the purchase a home. For this reason, and more, first time buyers often benefit from an FHA loan.
4. Buyers Who Want to Purchase a Multiunit Property
Purchasing a multiunit property can be an excellent way to buy a home for yourself while also getting an income-generating property. With an FHA loan, you can purchase a two-, three-, or four-unit property, making this an excellent option for aspiring landlords.
There are, however, certain requirements if you are using a government-supported loan to purchase a multiunit property. Most important, you’ll likely have to live on the property for a certain period, probably about a year. This is simply to ensure that you use the FHA loan for its intended purpose, which is to increase homeownership among the general population.
5. Buyers With Past Foreclosures, Bankruptcies, and Other Financial Issues
Homebuyers are people. People make mistakes. Bankruptcies, foreclosures, and other credit and financial problems often create challenges for buyers; for many loan programs they completely eliminate a borrower from eligibility.
FHA loans, however, can be more lenient. According to FHA rules, you have to wait at least three years after a foreclosure is complete. (This three-year period starts once the property has been transferred, not when foreclosure proceedings start.) This is fairly typical, but some programs may require even longer wait periods.
But the FHA has an important clause, an exception to the three-year period. If you can demonstrate that the foreclosure resulted from extenuating circumstances that were beyond your control, the three-year period can be waived.
These circumstances may include illness that caused the loss of income, the death of a household earner, or another issue where the household’s income was disrupted. Not all situations are honored under this clause, but it’s worth discussing past issues with a lending professional.
6. Buyers Who May Refinance in the Future
When purchasing a home and qualifying for a mortgage, you’re probably not thinking about refinancing. For most buyers, a discussion about refinancing is at least five years in the future; it’s most likely ten to fifteen years away.
But one advantage for FHA loans is the option to use FHA streamline refinancing. This is is a refinancing program that eliminates some of the time-consuming steps, including the appraisal. In most situations, the lender can simply access the information used to qualify the original loan and apply it to the new loan, making approval much quicker.
If a buyer is taking out a mortgage with high interest rates, perhaps because their credit is currently low, they can use an FHA loan now. Once the credit score improves (as a result, in part, or making timely mortgage payments), they can refinance to a better rate.
7. Buyers Interested in Home-Efficiency Upgrades
The FHA offers an Energy Efficient Mortgage Program, which “helps families save money on their utility bills by enabling them to finance energy efficient improvements with their FHA-insured mortgage.”
Basically, you can get a loan with an additional amount to cover energy improvements. These improvements can include the installation of solar and wind technology, or improvement to weatherize the home, such as thermostats and insulation. The cost of these improvements can be rolled into the entire loan.
8. Buyers Who Want a Condominium
Condominiums can be complicated. Because you’re not buying an independent property, but a unit within a larger building, financing for condos is influenced by the quality of the building, the financial status of the homeowners’ association, and nature of ownership for other units.
Because of the complexities, many lending programs and lending offices do not support the purchase of condos. However, this is an option for anyone who wants to purchase with an FHA loan. If you are a buyer who wants a condo as your primary residence, an FHA condo loan could by your best option.
Should You Use an FHA Loan?
If you are trying to choose the right loan for you needs, contact our team. We’ll help you make the right choice and show you all the available options.
With the right information, you can make a confident decision on your home loan, so contact our staff today!
