March 2nd, 2017 5:13 AM by Jackie A. Graves
FHA loans can open the door to homeownership, but may come with a
higher price tag.
The minimum FICO score requirement for a conventional mortgage is
620, but most approved borrowers have scores significantly higher than this
threshold. In fact, the average FICO credit score for an approved conventional purchase
mortgage is 752 as of January 2017. If you don't have rock-solid credit,
however, that doesn't necessarily mean you can't buy a house. Thanks to FHA
mortgages, borrowers with shaky credit could become homeowners and without a
massive down payment.
As of this writing, the minimum credit score required for an FHA
mortgage with 3.5% down is 580. The down payment can come from a gift or other
funding method -- it doesn't necessarily need to be from savings.
Furthermore, if your credit score is less than 580, you could
still qualify for an FHA mortgage, but with a higher down payment. In fact,
with a 10% down payment, credit scores as low as 500 are allowed. And because
the mortgage is insured by the FHA, the interest rate you get will be competitive with the
market average, even with a low credit score.
It's worth pointing out that you actually have three FICO scores
-- one from each of the major credit bureaus (Equifax, Experian, and TransUnion). Lenders
will typically use the middle score to determine your ability to qualify for a
mortgage. In other words, if you check your three-bureau credit score, and see
scores of 582, 595, and 603, the 595 is the one likely to be used for mortgage
qualification. So, if you only know one of your FICO scores, it might be a good
idea to buy a three-bureau report.
Also, if you're applying with another applicant, such as your
spouse, both of your scores will be considered, and the lending decision will
be based on the lower of the two.
As of 2017, the FHA maximum loan limits for single-unit homes
range from $275,665 to $636,150, depending on where the home is located, and
you can find your limits on HUD's website.
The loans are available on properties with one to four units, and higher limits
are allowed for multi-unit properties. In fact, one popular strategy to lower
housing costs involves buying a duplex, triplex, or quad, living in one unit,
and renting out the others.
As with most mortgages that require a down payment of less than
20%, FHA loans require borrowers to pay mortgage insurance. Unlike conventional
mortgages, however, FHA mortgage insurance must be paid both upfront and continuously, and it may not be able
to be cancelled after the loan's balance is paid down to 80% of the home's
Specifically, for loans with a down payment of less than 10% (most
FHA loans), the mortgage insurance premium must be paid for the entire term of
the loan. For loans with down payments of 10% or more, the mortgage insurance
can be cancelled after 11 years.
As I mentioned, there are two components of FHA mortgage
insurance. The up-front mortgage insurance premium is currently 1.75% of the
base loan amount, regardless of the loan's term or how big your down payment
is. For the ongoing mortgage insurance premium, the amount you pay depends on
the size of the loan, the length of the loan's tern, and your down payment:
Annual MI Premium
Years or less
DATA SOURCE: U.S. DEPARTMENT OF HOUSING
AND URBAN DEVELOPMENT, ACCESSED THROUGH WWW.FHA.COM. PREMIUMS EXPRESSED AS A
PERCENTAGE OF THE LOAN'S BALANCE EACH YEAR.
In a nutshell, these mortgage insurance rates are competitive with
the private market. However, the additional expense of the up-front premium and
the inability for most borrowers to eventually drop their mortgage insurance
makes FHA loans significantly more costly than the average low-down payment
FHA mortgages make up over 20% of new originations as of this
writing, so it's fair to say that they serve a purpose in the U.S. housing
Generally, if you can qualify for a conventional mortgage, or
maybe even a VA mortgage, it's usually the better option. However, there are
several factors that should be considered, such as the interest rate you get offered with each type of
loan. For lower-credit borrowers, the FHA mortgage might be the only path to homeownership, and may be a
good option to consider if you're tired of paying rent.
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