FHA loans provide great assistance to many first time home buyers by offering mortgage loans with lower down payments. While this is a benefit for many people, recent changes in policy may have put the loans just out of reach for some possible homeowners with questionable credit history.
For those interested in applying for an FHA loan, applicants are now required to have a minimum FICO score of 580 to qualify for the low down payment advantage, which is currently around 3.5 percent.
If your credit score is below 579 - 550, you aren't necessarily excluded from FHA loan eligibility. Applicants with lower credit scores will have to put down a 10 percent down payment if they want to qualify for a loan.
So if you're planning to buy a house, and your credit score doesn't meet the minimum, you should weigh the advantages and disadvantages of putting down a larger down payment or using those funds to try and improve your credit score first.
Benefits of an FHA Loan
The reason why FHA loans are so popular is because borrowers that use them are able to take advantage of benefits and protections unavailable with most traditional mortgage loans. Loans through the FHA are insured by the agency, so lenders are more lenient.
Here are a few benefits you can enjoy with an FHA loan:
Easier to Qualify
While most loans exclude applicants with questionable credit history and low credit scores, the FHA makes loans available with lower requirements so its easier for you to qualify.
Competitive Interest Rates
You've heard the horror stories of subprime borrowers who couldn't keep up with their mortgage interest rates. Well, FHA loans usually offer lower interest rates to help homeowners afford housing payments.
In addition to lower interest rates, you can also enjoy lower costs on other fees like closing costs, mortgage insurance and others.
Bankruptcy / Foreclosure
Just because you've filed for bankruptcy or suffered from a foreclosure in the past few years doesn't mean you're excluded from qualifying for an FHA loan. As long as you meet the other requirements that satisfy the FHA, such as re-establishment of good credit, solid payment history, etc., you can still qualify.
The FHA usually requires two lines of credit for qualifying applicants. If you don't have a sufficient credit history, you can try to qualify by using alternative credit (utility bills, car and life insurance, cell phone bills, etc. that have been paid on time for the past 12 months.)