Being a first time home buyer is both an exciting and frightening time. You cannot wait to find the house of your dreams, yet you worry about finding a lender, the interest rates and the final monthly payment. These concerns double if you have ever filed bankruptcy or have blemishes on your credit. This is why so many first time home buyers turn to FHA (Federal Housing Authority) loans. Since 1934 the FHA has been helping first time buyers like you make their housing dreams become a reality.
FHA loans offers many benefits that conventional lenders do not. They are much more lenient in a variety of ways; ways that would normally get you a big fat “NO” on other home loan applications. Let’s take a few moments to explore these benefits and why you should apply for an FHA loan when purchasing your first home.
Your Credit Score
Traditional lenders require a credit score of at least 720 before they will even consider approving you for a home loan. FHA, however, will approve you with a credit score of 620. Have you filed bankruptcy? No problem. Yes, you have to wait a bit, but with FHA the time is much shorter–two years after filing they will approve your application. If you haven’t filed bankruptcy, but have collections or late payments, they tend to overlook these provided you are now making payments on time. Liens, however, are not forgiven.
Down Payments and Interest Rates
With an FHA loan, your down payment is only 3 percent, versus the typical 20 percent required by most other lenders. They also permit the seller to pay up to 6 percent of the closing costs to make the process even easier on you. Although your FHA interest rate is variable (there may be some fixed rate FHA Loans), their rates are so low you actually pay less over the life of your loan than a person with a 30-year fixed mortgage rate.
It is actually fairly easy to get approved for an FHA loan, as they are lenient about who they lend to. You must have steady employment and meet the credit requirements, which we talked about earlier. They do expect a reasonable explanation for late payments, such as the loss of a job or a serious illness.
Importance of Debt to Income Ratio
Your debt to income ratio plays a vital role in any lender’s decision. They take into consideration all your current debt (i.e. car and credit card payments, school loans, etc.), and will add in your potential mortgage payment. FHA loans are much more lenient about this as well. They allow a 50 percent debt to income ratio, which is extremely high in the lending world.
Now that you have read this article, it is my hope that your hope is rejuvenated and your mind at ease, at least a little. Although your credit life may not be perfect, you still have a fighting chance at buying the home of your dreams, thanks to the Federal Housing Authority. During a time and economy that is making it difficult for first time home buyers to obtain a mortgage, FHA loans are giving you back your dream. Run with it.