Planning on getting an FHA loan for a house but aren’t quite sure which of the things you keep hearing are true? In this blog, we’ll debunk the top seven myths about FHA mortgages so that we can help you gain a better understanding of this financing option.
“FHA loans are given by the government.”
FHA loans are NOT given directly by the Federal Housing Administration. The FHA simply provides mortgage insurance to protect private lenders from delinquent borrowers.
An FHA loan is given only by qualified lending institutions such as banks, mortgage companies, and credit unions. The U.S. Treasury backs the loan and provides a guarantee to lenders that if you, a borrower, fail to continue your monthly payments, the FHA is obliged to reimburse it for you. Because of this, lenders are more confident to grant substantial mortgage loans to subprime borrowers.
It is important to note, however, that although the FHA provides insurance standards used as baseline criteria for qualification, it is still up to the lender whether to qualify you for an FHA mortgage or not. Approved lenders are authorized to choose which loan applications to process, underwrite, and close - without further approval from the FHA.
“FHA loans are only for low-income borrowers.”
Most people believe that FHA loans cater only to low-income home buyers or to those with credit scores below 600, but this is not the case. While they were originally intended for lower-income borrowers who are likely to find it difficult to qualify for a conventional mortgage, FHA loans are also available to anyone who meets the qualifications set by the Federal Housing Authority.
In fact, there is currently no maximum income restriction associated with FHA loans. The vetting process simply requires borrowers to submit proper documentation to substantiate income and assets. It is worth noting, though, that a home buyer applying for an FHA loan would still need at least a 3.5% down payment and a reasonable credit score (preferably 620 or above).
“FHA loans are offered only to first-time home buyers.”
First-time home buyers comprise most of FHA mortgage beneficiaries simply because they are the ones most likely to take full advantage of FHA loans’ low credit and low down payment requirements. But even if you’re buying your second or third or even fifth home, you can still qualify for an FHA loan.
Just remember that an FHA mortgage is not always the best fit for certain people looking to buy property. Most lenders would advise you to make sure if you really are better off with an FHA mortgage than with a conventional one.
“FHA loans are for borrowers with bad credit.”
It’s true that FHA loans are popular among borrowers with less-than-perfect credit scores, since the FHA allows home buyers with credit scores below 580 to apply. Based on FHA standards, a borrower with a credit score of 580 or higher qualifies for a down payment as low as 3.5%, while a borrower with credit scores between 500 and 579 will have to provide at least 10%.
However, most banks and mortgage companies across the U.S. follow stricter guidelines for FHA loans. The FHA penalizes lenders that approve too many “bad” loans, which is why borrowers with FICO scores lower than 620 may have a hard time getting approved for an FHA mortgage.
If you think you’re at a disadvantage in terms of credit, it’s best to know exactly where you stand so that you can create and execute a plan to improve your score.
“It is difficult to qualify for an FHA loan.”
The process may be quite tedious because of lenders that impose stricter guidelines - but don’t let that turn you off. A lot of qualified lenders are still willing to go easy on first-time home buyers and especially on those from underprivileged neighborhoods. Borrowers with lower credit scores, as well as those who have filed for bankruptcy in the past still have a real chance at qualifying. As long as you have maintained good credit since your bankruptcy discharge and have the proper documents in place, your chances of qualifying are still high.
Consult with different lenders, or ask an experienced agent who has worked with buyers who were approved for FHA mortgages. Gaining insight from people who have gone through the same application process will help you prepare better and up your chances of qualifying.
“FHA loans are cheaper than conventional mortgages.”
There are a lot of advantages to getting an FHA mortgage, including those mentioned above, but conventional loans also pose numerous benefits for certain borrowers and situations.
For example - If you get approved for a conventional loan and agree to make a minimum of 20% down payment, you no longer have to shell out money for a mortgage insurance. On the other hand, an FHA loan would require you to pay an upfront premium and a monthly premium -- no matter how much down payment you’re willing to settle. These costs may not seem overwhelming, but they add up to a lot.
All factors considered - if you’re still leaning towards getting an FHA loan, just be sure to ask your lender about your mortgage insurance premium (MIP). The current MIP rate is 1.75% of the base loan amount and is usually paid in monthly installments.
“I can’t get an FHA loan without a credit score.”
Actually, you can. The FHA is made available to borrowers without existing credit history, but the requirements may be a little tougher to meet. The FHA may impose lower debt-to-income ratios and cash reserve requirements on this type of applicant, and may not allow non-occupant co-borrowers.
Still, there are a lot of ways a borrower can show proof of reliability, such as a history of on-time payments which include utility bills, rents, student loans, etc. Showing at least a year of on-time payments should do the trick. If you are approved, you can even get maximum financing with a 3.5% down payment.