How FHA Loans Work for Low Credit Scores and First-Home Home Buyers

Your First Step to Walking into Your Dream Home

Are FHA loans a financial fit for those with low credit scores? If you aren’t ready for a 20% down payment, are building up your credit, or are managing debt, this route to homeownership might make the most sense for you.

FHA loans are offered by private mortgage lenders who have been approved by the Federal Housing Administration (FHA). As the government agency that insures them, the FHA gives lenders a layer of security against default — this, in turn, opens up homeownership opportunities for first-time homebuyers.

Although FHA loans are a great option for first-time homebuyers, you don’t need to be a first-time buyer to qualify for one. If you have a history of credit or financial difficulties, including bankruptcy, or haven’t bought a home in the past three years, an FHA loan may still be your go-to option. Benefits of an FHA loan include a lower down payment, lower credit score requirements, and competitive interest rates. Let’s go through the FHA loan down payment requirements to see what credit score it takes to qualify.

Your down payment is the upfront payment you make on the price of a home. The amount you put down with an FHA loan ultimately depends on your credit score, but as long as you have a score of 580 or higher, you can take advantage of a low 3.5% down payment. This is vastly more affordable than a 10% or 20% down payment that comes with conventional mortgages. If your credit score is below 580, you’ll likely need to make a 10% down payment. Gift funds from relatives, employers, and more can also be applied to the down payment of an FHA loan.

Applying for an FHA Loan with a Low Credit Score

Check Your Debt-to-Income Ratio

A good debt-to-income ratio can mitigate the effects of a bad credit score. To meet the requirements of an FHA loan, you need to prove steady employment and show that your total monthly debt payments don’t exceed 50% of your gross income. This includes student loans, auto loans, credit cards, other mortgage payments, and personal loans.

Interest Rates

Available as a fixed-rate loan or an adjustable-rate mortgage (ARM), the interest rates that come with FHA loans are also fairly competitive compared to conventional mortgage rates. They vary depending on your income, credit score, down payment, DTI ratio, and more. Compared to FHA loans, conventional loans have stricter credit score requirements and look further back into your credit history.

FHA Loan Requirements

Check Property Requirements

Verify that the property you’re looking at meets the requirements for an FHA loan. To qualify, this property must be your primary residence and be a single or multi-family home. In Arizona, the FHA loan limit varies by county, averaging around $350,000 for a single-family home. If you are trying to estimate your monthly payments, a mortgage calculator is a great tool to see how your down payment amount might change it.

Cover Closing Costs and Mortgage Insurance

The last thing you need on any home buying journey is an unexpected cost. With an FHA loan, you will cover closing costs and mortgage insurance. When considering closing costs, you should budget anywhere between 3% and 6% of the home price. While it’s not guaranteed, you also have the ability to negotiate with the seller to pay up to 6% of your closing costs for you — helping to keep your costs lower.

You will also need to pay an upfront mortgage insurance payment (UFMIP), usually 1.75% of your loan amount. With a 3.5% down payment, you will continue to pay mortgage insurance monthly on the life of the 15- or 30-year loan. In addition to insurance payments, you will need to factor in an annual mortgage insurance premium (MIP) based on your down payment and mortgage amount, which should come out to 0.45–1.05% of the loan amount.

John J. Kresevic Offers a Quality Lending Experience at JFQ Lending

When making your next major financial decision, you need quality information, resources, and experienced guidance from a local source you can trust. As CEO and co-founder of JFQ Lending and more than 13 years of mortgage lending experience, John J. Kresevic is an expert in multiple lending options and understanding your situation.

JFQ Lending has expanded to include three locations across Arizona, California, and Texas. If you’re comparing lending and refinancing solutions, turn to the experts in FHA, VA, USDA, Conventional, and Jumbo loans. Visit JFQ Lending today to learn more about our FHA home loans and other loan products and to apply quickly and easily online.

“Help me understand your situation so I can help you buy your dream home. I want you and your family to know your options, get the financing that fits your needs, and know you’re saving on your mortgage.” — John J. Kresevic