If you are in the market to purchase your first home, it is helpful to understand all the different types of loans on the market that you can apply for. There are multiple types of mortgages that you can obtain beyond a conventional mortgage. One of the most popular types of alternative mortgages that one could obtain is an FHA loan.
FHA Loans Are Good For Individuals with Lower Credit Scores
One of the best things about the FHA loan program is that lenders are willing to work with individuals with lower credit scores, although having a higher credit score still has its advantages, even with an FHA loan.
With an FHA loan, if you have a credit score of at least 580 or higher, you only have to put down a 3.5% down payment, which is an incredibly low down payment for a new home. For example, if you were purchasing a home for $200,000, a 3.5% down payment would only be $7,000 dollars. A traditional down payment is around 20% or $40,000 for a $200,000 home. You would have to put down $33,000 less with a high FICO score with an FHA loan.
If you have a lower credit score, the FHA is still willing to work with you, they are just going to ask for a larger down payment up front. If your credit score is lower than 580, you can still secure a home loan with a 10% down payment. Even a 10% down payment is a good deal compared to a conventional down payment of 20%. For a $200,000 home, you would only have to put down $20,000, savings you from needing an additional $20,000 dollars.
The lower credit score requirement and the lower down payment can help make home ownership easier for individuals that have not established much of a credit history or who made poor credit decisions in the past.
FHA Loans Make Qualifying for a Home Loan Easier
FHA loans make it much easier in many aspects for a potential buyer to qualify for a residential home loan. To start with, as discussed above, FHA lenders are willing to work with individuals who have a lower credit score than traditional loan lenders.
Traditional loan lenders often don't just look at the number on your credit score, they look at the history behind it. Even if you have a high credit score, if you have a bankruptcy in your past, or any missed payments, a traditional lender may still pass you over for a loan.
FHA loan lenders are more willing to work with individuals who have had missed payments, bankruptcy, or even a foreclosure in their past. They are willing to look past these past mistakes if you have shown that you have been making your payments on time and working to establish a good credit history since those incidents.
If you need more flexibility when applying for a home mortgage, you may want to learn more about qualifying for an FHA loan as well as all the requirements and financial implications of taking out an FHA loan.