FHA is a great tool for First-Time Buyers or those with limited down-payment funds. The standard FHA loan only requires a 3.5% down-payment, it also requires monthly mortgage insurance as well as an upfront mortgage insurance fee that is rolled on top of the loan balance. This down-payment must either be personal cash from savings, a cash gift from a family member, or perhaps a gift from your employer. The seller is NOT allowed to pay any portion of your down-payment. However, the seller can assist with closing costs if the contract is negotiated with those terms.
FHA says that they offer loans for borrowers with credit scores as low as 580 however, most reputable lenders have additional in-house requirements they lay on top of the government guidelines. Most local lenders now require a minimum 620 credit score.
FHA Facts and Tips
- Closing costs can be slightly higher with FHA loans and underwriters now require full income, credit, and employment verifications.
- FHA buyers must be owner-occupants, investors are not allowed.
- An individual can not have more than one FHA loan at a time. If you plan to keep you current residence as an investment property, you will likely need to refinance it to a conventional loan before buying a new property.
- FHA is not encouraged for properties in need of substantial work or repairs, although they do make a special loan product for this purpose called 203k.
- Because FHA is partially under-written by the federal government these loans can take a bit more time to close with last-minute requests for paperwork; I would recommend at least 45 days from contract date to the closing date.
- If purchasing a condominium with an FHA loan, make sure the development is on the HUD-Approved Condo Development List.
- If you don’t have access to the full 3.5% down-payment, try looking at these alternative options.
