For first-time homebuyers with a less-than-perfect credit score, qualifying for a mortgage loan may seem impossible. These homebuyers with low credit scores can use an FHA (Federal Housing Administration) loan to purchase a home. Here are some incentives first-time homebuyers enjoy when using FHA loans:
Low Down Payment
Conventional loans usually require a higher down payment and credit score. A large down payment that’s around 20% of the full cost is no longer a barrier while using FHA loans. With FHA loans, you only need a low down payment to buy a home, closer to a minimum of 3.5% of your dream home’s sale price. The much lower down payment is helpful for buyers struggling with limited financial resources. Your credit score still matters when determining the down payment you will pay. An individual whose credit score ranges from 580 and above makes a lower down payment than one whose score is less than 580.
Seller Concessions
First-time homebuyers using FHA mortgage loans save money from seller concessions. A selling concession is an agreement where the seller pays part of the buyer’s closing costs. These costs could be related to inspections, repairs, or improvements the home needs. The arrangement makes the deal more desirable and the house more affordable. Concessions result in reduced upfront costs, allowing borrowers to provide higher offers. A higher offer will likely stand out and increase your chances of buying the home.
Low Credit Score Requirements
Your chances of qualifying for a home loan are minimal if you have a low credit score. FHA loans come with lenient credit score requirements to cater to borrowers with bad credit. That is because the federal government insures these loans and makes them more accessible for anyone with low approval odds for other mortgage loans.
Individuals whose credit score ranges from 500-579 will still qualify for an FHA loan, but they must pay a higher down payment, usually 10 percent. You can prove your creditworthiness by submitting proof of additional factors to qualify for FHA credits despite having bad credit. Such factors include increased earning potential, verified cash reserves, and little to no debts.
Lenient Debt-to-Income Ratio
The debt-to-income (DTI) ratio is another qualifying factor a mortgage loan looks into. DTI ratio compares total debt with gross income. Homebuyers with lower DTI have better chances of qualifying for the loan because they have more money to pay the loan. FHA loans have friendlier approval requirements regarding the DTI ratio. If you have a larger amount of debt, you will likely qualify for this loan, unlike conventional loans. Various compensating factors, including cash on hand, higher credit score, and non-occupant co-borrower, will boost the chances of your loan approval.
Better Interest Rates
First-time homebuyers using FHA loans benefit from low interest rates. You may opt for a fixed-rate or adjustable-rate mortgage (ARM), depending on the option that suits your financial situation. Although the economy influences mortgage interest rates, there are ways to reduce the rate. Your income, down payment, credit score, and loan term can increase or lower your FHA loan interest rate.
Applying for FHA Loans
Higher down payments or a bad credit score don’t need to prevent you from qualifying for a mortgage to purchase a home. FHA loans make buying dream homes easier for first-time homebuyers. When applying for an FHA loan, work with a mortgage broker to enjoy better deals. Contact your trusted broker today to apply for an FHA loan and buy your new home.