For potential homebuyers with less-than-perfect credit or less-than-ideal cash savings, an FHA-insured loan can be a great choice, offering lenient, flexible requirements difficult to find with other loan types. Unfortunately, despite these benefits, many people who could get the most out of the FHA home loan program have been discouraged by falsehoods and misconceptions about the program.
Read on to find out what these FHA mortgage myths are and get the facts, so you can decide for yourself whether an FHA loan is right for you.
FHA Myth #1: You Need Perfect Credit to Get an FHA Loan
Actually, one of the primary benefits of FHA loans is that, because they are insured by the government, they can be more lenient in their credit requirements. For first-time buyers and for those with less-than-perfect credit histories alike, FHA loans are a lifesaver. That's especially helpful for first-time buyers who are still building their credit profiles.
Yes, FHA lenders still want to see that you have the capacity to make your monthly payments on time, but they won’t base their judgment solely on a credit score. Whereas conventional loans will turn their nose up or jack up interest rates at anyone with a credit score under 700, FHA lenders have been known to take credit scores as low as 500 or individuals who have undergone foreclosures, short sales, or bankruptcy in the past.
Myths aside, the truth about the FHA home loan program is that it was created to make homeownership available to more people, especially those with less-than-perfect credit.
FHA Myth #2: Only People with Bad Credit Get FHA Loans
Even with the FHA’s more lenient credit requirements, studies show that the average FHA borrower has a credit score well above 700. But why would someone with excellent credit opt for an FHA loan?
While many of these people would obviously have met the credit requirements for conventional loans, they likely did not have the cash on hand for a large down payment. When you consider that conventional loans often require 20% down, but FHA loans only 3.5%, it’s not surprising that even buyers with excellent credit would choose FHA loans.
FHA Myth #3: Most Properties Don't Qualify for an FHA Loan
FHA loans can be and are regularly used on a variety of properties, from homes that have normal wear and tear to homes in need of rehabilitation. But even the FHA won’t take all properties.
If, in the course of an appraisal, a home is found to be in such bad shape that it’s worth far less than the asking price or that issues in the house present a serious risk to the borrower, the FHA will not approve a loan for it. This is the FHA's way of ensuring you, them, and the lender do not get stuck with a bad investment.
FHA Myth #4: FHA Will Lend on ANY Property
The truth is, FHA-insured loans are approved only after a property has been found conform to "nationally-recognized building codes." Moreover, the majority of the FHA's requirements are just plain common sense.
Ultimately, most FHA loans are designed for people who intend to use the property as their primary residence, so all parties are motivated to make the property in question as high-quality and as strong of an investment as possible.
FHA Myth #5: You Must Wait Seven Years after Bankruptcy to Get an FHA Loan
Thanks to recent changes to FHA guidelines, if you have experienced a bankruptcy, short sale, or foreclosure, you may qualify for an FHA loan after just a year, if you:
- Can show that the bankruptcy was caused by extenuating circumstances beyond your control
- Have shown your ability to manage your finances responsibly since then
- Can show that the events which led to your bankruptcy aren't likely to happen again
In fact, for those who have fallen on hard times, an FHA loan can provide a valuable step toward recovery that many other loans don’t provide.
FHA Myth #6: Self-Employed People Can't Get FHA Loans
Actually, self-employed individuals need only prove their last two years income, which can be accomplished with bank statements and tax forms. Also, as with any loan, they have to demonstrate that their income has been fairly stable over time.
Since lenders prefer as much certainty as possible in issuing loans, the irregularity of self-employed people’s income can cause them to deny a loan application. But the truth is, if a self-employed individual can prove their income and the stability of the income for the last two years, they have as a good a shot at getting an FHA loan as anyone else.
FHA Myth #7: You Need a Big Down Payment for an FHA Loan
With a required down payment of only 3.5%, this is the best part about FHA mortgage loans, especially when compared to the standard 15-20% down payments required on many conventional loans. Also, FHA loans allow you to use gift funds from family members or grants for your down payment—something typically not offered by other loans. It’s no wonder why so many are turning to FHA loans to get into their own homes.
Ready to get the truth about FHA loans? Contact a Mortgage Advisor today.