There’s good news for home buyers today. The FHA is making it easier to get approved for home loans by lowering credit history minimum requirements. The big banks and other important lenders are taking on FHA mortgages on loans where borrowers have as low as 580 scores on their credit reports. That’s 60 points less than last year’s minimum requirements to get a home loan from most lenders.
At this time last year, lenders who accepted FHA loans required a minimum of 640 for borrowers applying for a home loan. FHA loans are in high demand now, and the lowered credit score requirements are a big boost for home buyers looking to get the most out of their new home purchase. FHA loans have the best down payment options which helps many people get into homes that they otherwise might not be able to do. At only 3.5% nationwide, FHA loans allow people to get the homes they want with less cash up front.
LOW 3.5 PERCENT DOWNPAYMENT ON FHA LOANS
The mortgage industry is dependent on bank loans to keep it moving. Most people need help financing any home purchase. When interest rates and down payment requirements are high, home sales dwindle. FHA loans help buyers by lowering down payment costs. Because FHA loans are insured by the Federal Housing Administration, lenders are willing to extend loans to buyers who meet the FHA requirements. FHA loans are available to all U.S. new home buyers and U.S. residents looking to refinance existing home loans.
The FHA began to help Americans afford homes and live the American dream. Started in 1934, it is the biggest home mortgage insurer in the world. People can’t go to the FHA to get a loan. They do not provide loans to people, they are a loan backer that insures a bank that loans will be paid if they go into default, thereby taking the risk out of lending money to people for home purchases.
With less risk involved for the lender, the banks can afford to be more lenient on their requirements. That doesn’t mean that anyone can simply request an FHA loan and get one, there are minimums to be met, but the FHA has made it possible for many people to own their own homes. The FHA provides lenders with a rulebook known as the FHA Guidelines. In this book, lenders can see exactly what the minimum requirements are for loan approval. The FHA Guidelines book also makes stipulations on the types of loans that will be backed, and what loan traits are allowed.
The FHA requires homeowners to pay a minimum down payment on a home loan. They must produce at least 3.5 percent of the total cost of the home purchase price. Along with the down payment requirements, the FHA gives guidelines on handling home loan applicants with bankruptcies, short sales or foreclosures on their records.
According to the FHA Guidelines book, banks can approve loans for borrowers with serious credit history issues such as bankruptcies and foreclosures on their records 12 months after such events. There are also limits on how much a home owner can borrow toward the purchase of a home with FHA backing.
The FHA only allows up to $271,200 for loans on a single family home. Loan amounts can go as high as $1,202,925 for a multi-family dwelling.
FEWER INVESTORS INCREASES FHA LOAN APPROVALS
The problem for many home buyers is that banks often include their own restrictions on home loans in addition to those given by the FHA. So, even when a loan is backed by the FHA, a lender may add requirements that they have for a loan on to the application process. This is known as an investor overlay. The bank is ultimately the one taking the risk on the loan, and hoping that all goes well. Those overlays have made it difficult for buyers to get approved for FHA loans even when those buyers meet minimum FHA requirements.
One example of such investor overlays occurs with the FHA Streamline loan. This is a loan meant to make it easier for homeowners with a current FHA loan to refinance for a better rate or terms without all the hassle of a full scale loan application. With the Streamline loan, lenders can consider the loan based on previous application information from the current loan. Included in these provisions is the elimination of income and employment verification or credit score verification.
Many lenders still require those figures even though the FHA does not. The reason this happens is that even though the FHA doesn’t require banks to check those figures, there are penalties imposed by the FHA for bad loans. Lenders can even be removed from FHA programs altogether if they have too many bad loans on their records.
Another overlay is credit score minimums. The FHA actually only requires a score of over 500, but banks are less likely to allow a loan at those levels. Because history has shown that loans to borrowers with credit scores of 500 are most likely to default within 6 months and that adds to the negative default history for the bank with the FHA, most lenders began requiring at least a 640 credit score in 2011. However, changes have allowed banks to lower that requirement immediately.
Home buyers in the U.S. can get an FHA backed loan with credit scores as low as 580 now. An improved economy and low housing costs are allowing for a loosening of restrictions, and they may even drop further in the near future.