To most people, getting a mortgage is a difficult process especially if you have a poor credit score. While most lenders will deny you credit, the ones that approve your loan will squeeze out of you every dime you own by stamping high-interest rates on those loans.
This is where FHA loans come in. While you also pay high-interest fees with a lower credit score for emergency funds it is not as exaggerated as the ones offered by individual lenders not insured by FHA.
What is FHA loan?
This is a mortgage loan insured by the Federal Housing Administration. In recent times, FHA credits have gained quite the following; particularly with first-time home purchasers. This is due to the fact that prerequisites are less strict than typical mortgages.
For instance, you can qualify for an FHA credit with a credit score less than 580 and down to 500 if you have paid a 10% down payment. In most cases, a very low down payment is considered to be enough where the applicant’s credit score is 580 or above.
Benefits of FHA loans
This type of loan is very easy to qualify for. And while the aim behind the creation of this mortgage loan was to ensure mortgage lenders were well insured against the risk of defaulting borrowers, it was also meant to make the housing market grow by making loans open and reasonable for individuals with poor credit scores and who are unable to march high down payments.
Other benefits of FHA loans include forgiving debt ratios where you can qualify for a loan even if you have an outstanding debt that takes 41% of your income unlike in other conventional loans. You also save more money since the interest rates are much more favorable. While FHA loans are issued to people with credit scores no lower than 500, exceptions can be often made where individuals have insufficient credit. Though, they will need to meet some requirements.
Credit score requirement in 2016
HUD Handbook 4000.1 was published recently containing details of the revised requirements for FHA loan. This manual has been in effect for the most part of 2016. In addition to other things, it clarifies the minimum credit score allowed for FHA credits in 2016. The following are thus the other requirements for FHA credits.
- 500: This is the score set in the manual by FHA to be the absolute minimum credit. Individuals having credit scores below this would be declared not eligible to qualify for any FHA approved loan.
- 500-579: Individuals wishing to purchase a house with a credit score in this range would have to pay a 10% down payment.
- 580 and above: While in most cases this credit score would be just below the required amount, in FHA loans this will make you eligible for a 3.5% down payment
- 620 and above: debt to income ratio requirement is brought up to 56.9%. This means your outstanding debt will not impact you borrowing as opposed to other loans
- 620 and below: debt to income ratio is significantly reduced to 41% but still a notch higher than other conventional loans that require this ratio to be no more than 36%