Low Down Payment Options Available!
Updated: Oct 15, 2019
Understanding the different down payment and lending options available to you when looking to purchase a home are key. In this quick breakdown, we are going to review the 3.5% down payment FHA loan option.
FHA Over Conventional
FHA loans allow home buyers to purchase homes with as little as 3.5% down payment. What makes FHA loans more accessible to home buyers are some of their more lenient qualifying guidelines versus the conventional option.
Credit Score Qualifications
FHA loans are a little easier to qualify for, allowing for borrowers with a 580 credit score or higher to qualify for the 3.5% down payment option. Borrowers with a credit score between 500-579 may still qualify for an FHA loan, however, they will need to enter into a purchase with at least 10% down (should the additional qualifications be met).
Should your credit score not be at the level for qualification, there are steps you can take that can get you to that level in as little as 60 days. Your lending professional will be able to assist you with locating action steps to increase your credit score, which could include partnering with a reputable credit recovery team to assist in increasing at a steady and quick rate.
Debt to Income Ratios
Debt to income ratio and what is it? Your debt to income ratio, or DTI, is the percentage of your monthly pre-tax income that you spend on your monthly debts, which include your mortgage, car payments, credit account payments, etc. Most institutions would prefer your debt to income ratio to be around 43%, however there are instances where approval is given with a DTI of 50%.
Mortgage insurance protects the lender in case of default. Conventional loans will require borrowers to pay for mortgage insurance if their down payment is less than 20%. FHA loans require mortgage insurance regardless of down payment amount. Other differences include:
FHA mortgage insurance premiums cost the same regardless of your credit score. Private mortgage insurance on conventional loans costs more if you have a low credit score, but it may cost less than FHA mortgage insurance if your credit score is above 720.
FHA mortgage insurance premiums last for the life of the loan.You can remove the FHA mortgage insurance by refinancing to a conventional loan. Additionally, private mortgage insurance is automatically canceled on conventional loans after your equity reaches 78% of the purchase price. Both FHA and private mortgage insurance costs vary according to the amount of the down payment.
When purchasing a home using an FHA loan, the buyer will need to occupy the home as a permanent resident. An FHA loan cannot be used for vacation type properties, or properties that are going to be flipped. Conventional loan options or cash would need to be used for those type of property purchases.
FHA has always had a strong hold on the first time home buyer group, who usually have limited funds for a down payment. Coupled with the more lenient credit guidelines, FHA loans allow home buyers to enter into a market they would more than likely be excluded from.
We will be touching on FHA Down Payment Assistance Programs in our upcoming blog series. Multiple programs are available for first time home buyers. Contact THE PARKER GROUP directly at 949.427.1350 for additional information prior to the blog being released.
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All information in this article is from the perspective of a Realtor, any additional questions or direct lending questions should be asked and answered by a lending professional.