For some borrowers, the lack of a downpayment is a significant challenge. For others, their income might keep them from being able to purchase a top-quality home in the neighborhood they prefer.
For some, their credit holds up the mortgage process.
Because of past issues, they have severely damaged credit, and even though their income is strong and they have learned to manage their debts, poor financial decisions in the past still haunt their present.
But there are solutions, and one of the best is a low-credit loan supported by the FHA. This loan option can reduce the perceived risk and create more opportunities for borrowers.
How Does an FHA Loan Work?
The FHA supports mortgage lending by insuring loans that fit their specific requirements. So while they don’t loan money, they are creating more lending options by providing incentives to lenders.
With an FHA loan, if the mortgage goes into default, the FHA will financially compensate the lender. This reduces the risk assumed by banks and other lending institutions, which means more available loans for borrowers.
FHA Loans: A Two-Tiered System
The FHA has a criteria for lending based on two groups of credit scores. The first group is for people with mid-level or high credit. If you have a score 580 or higher, you will be eligible for an FHA loan with a downpayment as low as 3.5%.
But if you have low credit, there is another FHA loan option. If your score is between 579 and 500, you can still use an FHA loan, but you will need a downpayment of at least 10%. This is obviously a large jump, but if you can generate the downpayment you will have the chance to purchase the home you desire.
So if you have low score, but one that is at least above 500, and you have a large pile of cash that could be used as a downpayment, an FHA low FICO loan might be the right choice for you.
How Does a Low FICO Loan Support Your Purchase?
So what does all of that mean to you, the borrower? Why does it matter that the FHA provides insurance to lenders? It would seem that this insurance only helps the lender and does nothing to help you and your home purchase.
But low FICO FHA loans do support your purchase. They do so by increasing your chances of approval.
While no one is guaranteed approval (under this or any loan program), the FHA increase your chances of approval by reducing risk to lenders. When risk goes down, lenders are more willing to supply the financing you need.
Think Like a Lender
To fully understand how FHA low FICO loans support your purchase, let’s look at the issue from the perspective of a lender. If you are loaning money, your primary concern is to reduce risk and increase your chances of being repaid while earning a small interest percentage. (Without interest, which gives lenders incentive, lending would be seriously reduced if not eliminated.)
Pretend Mr. John Anyman comes to you seeking a loan. John has a decent income but a low credit score, so your internal risk-alarm starts to sound. You worry that because he has had difficulty repaying debts in the past, he is more likely to struggle with payments in the future. So you decide to deny the loan application.
But hold on.
Now the Federal Housing Administration steps in and says that if you issue a loan to Mr. Anyman under a specific set of circumstances, they will insure the loan and provide a financial safety net. You’ll still earn a profit on the loan, but your risk is seriously reduced. (Not quite eliminated, but reduced.) Now you, the lender, can issue the loan and the Anyman family can purchase a property that will make them happy for years.
By reducing the risk to lenders, the FHA has made financing for low-credit borrowers far more accessible. For some borrowers, financing would not be available without the insurance that the FHA provides to lenders.
This is how FHA low FICO loans support your home purchase.
Why Ten Percent? Another Way to Reduce Risk and Increase Lending
As we discussed above, lending can be boiled down to risk measurements. Although finding the answer involves complex mathematical formulas and intricate financial equations, lenders, essentially, just need to know if the risk is low enough to justify making a loan.
But there are ways to reduce this risk, including downpayments. Statistically speaking, the higher the downpayments the less likely someone is to default on a loan. Also, if someone defaults on a loan that had no downpayment (100% financing), then the lender has far more cash to recoup on the sale of the property. But if there was a 10% downpayment (90% financing), the lender is slightly ahead of the game, financially speaking.
So to reduce risk, the FHA requires that low-credit borrowers using FHA loans bring a 10% downpayment. Of course, if you are struggling with credit, saving for a downpayment can be difficult, but there are assistance programs that help you generate a small pile of cash that can be use for a downpayment, and it may also be possible to use a financial gift that can be applied to the loan.
FHA Low FICO-Score Loans are Available
If you want to enjoy the benefits of a low-credit FHA loan, contact the staff at San Diego Purchase Loans today. Whether you have a low FICO score or no downpayment, we have the experience and resources to help you find the right loan for your current situation.
From jumbo loans for massive properties to low-balance FHA loans for moderate, comfortable housing, we will do our best to improve your living situation! If you are approved, we can even send your FHA low FICO loan to FastTrack, allowing you to get the finances you need quickly so you can move into a wonderful home as soon as possible!
“Chad and The Chad Baker team really helped me from start to finish with my loan process. They were extremely responsive and provided me updates on a daily basis. I had a few personal issues that they helped me work through so I could get the best loan program and best rate. Very knowledgeable about the industry, rates and trends. I HIGHLY recommend Chad and his team. I’m happy to offer a reference upon request. Please ask Chad for my contact information.”
EXCEPTIONAL, SUPER EXCEPTIONAL! The most professional, accountable and committed mortgage service we have ever worked with. With numerous experiences in buying and refinancing homes, by far Chad Baker and his team remain at the top of our list. We feel very blessed to have located such a committed company who serve their clients with an exceptional first “first class” mindset.
Chad and his team was awesome throughout the entire process. They made things easy and smooth, and able to answer any questions at anytime. By far the best experience with a lending team yet. Great job!”