The Federal Housing Administration gives out FHA loans. FHA loans in St. Louis have become very popular among first time home buyers who either have bad credit or not a lot of savings (or both!), as they require a minimum 3.5% down payment and a credit score of at least 580.
These FHA insured mortgages are backed by private lenders, which helps shield them financially in the case of the homeowner defaulting the house payments. The mortgage insurance premiums are paid by the borrower, which would be you, the homeowner.
These loans can be used for a wide variety of homes including single family homes, buildings with one to four units inside, approved condominiums, and some mobile homes. These FHA loans, of course, can be used to either buy or refinance these homes.
The FHA 203(k) loan can be used for home renovations to be carried out, and there are more, specialized FHA loans that can be used to upgrade technology in the home (regarding energy efficiency) or reverse mortgages for the elderly homeowners.
Remember–only FHA approved lenders can grant you an FHA insured loan.
How is an FHA loan different from a “regular” loan?
The biggest difference is that it is far easier to be approved for an FHA loan than it is for a conventional loan from a bank or other financial institution. A conventional loan is a loan that is not backed (insured) by the federal government. Also, the FHA loan ensures that you are approved at a lower credit score, which may translate to lower monthly mortgage fees. They also are a lot more generous when it comes to down payments being made by family, charitable organizations, or employers on your behalf. The mortgage rates and closing costs are often lower as well.
What are the requirements and eligibility for an FHA loan?
You can qualify a lot more easily for an FHA loan that for a conventional loan. The following is a summary of their standards, with links to other articles that focus on FHA loans.
- Credit Score. Your credit score needs to be at least 500. If it is 500 or above, then you can qualify for an FHA loan. Generally, conventional loans require a 620 credit score, but this varies among institutions.
- Minimum down payment. FHA loans require a minimum down payment of 3.5%, if your credit score is 580 or above. For conventional loans, usually the down payment is 10%, if your credit score is anywhere between 500 and 579.
- Loan limits. The limits to the FHA loan depends on the location of the home. This limit goes up and down, depending on how expensive or inexpensive your location is.
- Debt to income ratios. FHA and conventional loans are the same here, your debt payments you have to pay every month can be up to 50% of your pretax income.
- Mortgage insurance. FHA mortgage insurance cannot ever be canceled if you made less than a 10% down payment, while with a conventional/private mortgage can be canceled if your home equity accumulates enough.
- Foreclosure. You cannot get an FHA loan if you have had a foreclosure or had to surrender your property deed instead of a foreclosure within the last three years. The only exceptions are serious illness or death of a wage earner within the household.
- Further requirements for an FHA loan include: a valid social security number, proof of United States citizenship (or legal permanent residency and ability to work legally), and having to be age appropriate under your state’s law to sign a mortgage.
Is the FHA loan the right move for you?
Conventional loans usually require a credit score of 620 or higher, so you don’t have much choice if you want to buy a house with a credit score below that.
- If your credit score is higher than that, an FHA loan might be the way to go because you could get lower monthly mortgage payments than a conventional loan.
- FHA loans are less than PMI monthly payments if your credit score is under 720, while PMI is less than FHA if your credit score is above 720.
- FHA loan also generally have lower closing costs, with competitive interest rates that are generally lower than conventional loans.
Remember though–FHA loans are not the only lower down payment mortgage loans in the business. If you have ever or are currently serving in the military, the Department of Veteran Affairs might be able to take out a loan for you. They would not require a downpayment and if you live in a “rural” area (as defined by the U.S. Department of Agriculture), then you could also get a USDA loan (which also doesn’t require a down payment).