Homeownership Beyond Excellent Financial Health: More About FHA Loans

Far too often, some people falsely believe that to buy a home, you have to be in excellent financial health. While it certainly does not hurt to have all your finances in order, sometimes life gets in the way. In these instances, when the unexpected happens, homeownership should not become a distant dream. If you are someone who has faced some challenges but wants to own a home, learn about some of the advantages that a Federal Housing Administration, or FHA, home loan offers.  

Credit Score Leniency

With many traditional mortgage programs, it is not unheard of for lenders to require a buyer to have a credit score that is at least within the mid 600s. For higher value homes, the score minimum could be even higher. 

FHA loans are available to buyers with credit scores as low as 500. So, if medical bills or lost income led to credit concerns, you still have options. Keep in mind, different lenders have their own overlays or requirements. For instance, one FHA lender could have a 500-score minimum, another 550, and another 580. So, it is important to do your research.

Reduced Down Payment

One of the greatest roadblocks in the home buying process is the down payment. Most mortgage programs want buyers to be prepared to put down anywhere from 10 to 20 percent of the home's value. For a $250,000 home, that is $25,000 to $50,000, which is a lot to save for the average person, or even household.

The FHA program offers a reduced down payment rate of about 3.5%. As a result, the same $250,000 home would only require a down payment of $8,750. It is worth noting that you are not required to only put down this amount. If you can afford to pay more, you can.

Debt-to-Income Ratio

Mortgage companies have front-end and back-end debt-to-income ratios, which is the ratio between the amount of your expenses each month compared to your income. Traditional loan programs have a front-end ratio of 28%, which means that your expenses, minus the mortgage payment, cannot exceed 28% of your income. 

The back-end is 36%, which means that your expenses, plus the mortgage, cannot exceed 36% of your income. With an FHA loan, because the loans are backed by the federal government, lenders are willing to approve mortgages that have a back-end debt-to-income ratio that is as high as 50%.

It is best to speak with a professional who works directly with this loan program to learn more about the specific qualifications you need to meet and how to get started on your path to ownership. Reach out to an FHA mortgage loan program to learn more.