FHA mortgages have long been popular among homebuyers with limited financial resources, attracted by down payments of as little as 3.5 percent. But it’s also a good option for borrowers with less-than-perfect credit as well.
The FHA’s market share of home purchase mortgages ballooned after the crash, going from one in 20 loans in 2006 to one in three in 2009 as lenders raised down payment requirements and tightened credit overall. That share has fallen back somewhat since then as down payment requirements have eased, but has remained high amid tight credit requirements.
It’s well known that FHA loans have lower credit requirements than for regular conforming loans backed by Fannie Mae and Freddie Mac. What’s less well known is just how dramatic that difference is.
Mid-600 credit scores often approved
The average FICO score for home purchase mortgages approved in February was 724, according to recent figures from the mortgage software and processing firm Ellie Mae. That figure represents moderately good credit.
But when you break those figures down, the average FICO score for FHA purchase mortgages was 689, while the average on conforming Fannie/Freddie loans was 755! That latter figure represents very good credit, while the FHA figure is what you’d expect from moderately blemished credit. It’s a major difference.
Technically, the FHA will allow mortgages issued to borrowers with credit scores as low as 500, provided that other guidelines are met. In practice, lenders won’t issue loans to borrowers with scores that low because they’re concerned they might be accused of negligent underwriting if the loan goes into foreclosure and be required to buy the loan back. In fact, four out of 10 FHA loans approved in the fourth quarter of 2010 were to borrowers with FICO scores in the 640-679 range.
Fees are higher
The downside of an FHA mortgage is that the fees and mortgage insurance charged is more costly than on conforming loans. In addition, if you put less than 10 percent down you have to carry mortgage insurance for the life of the loan, rather than being able to cancel it when you reach 20 percent equity, as with a standard mortgage (though you can get around this by refinancing).
Still, with mortgage rates still unusually low by historic standards, and home prices still well below their pre-crash levels, an FHA loan may make good financial sense for someone who’s looking to buy a home now, rather than waiting a few years for their credit to improve.
First published on MortgageLoan.com at: http://www.mortgageloan.com/poor-credit-consider-fha-loan-9688
Let me help make your dream of homeownership come true. I specialize in finding you the right loan that meets your specific needs and financial goals. With mortgage rates still near historic lows, make this year the year to make your homeownership dream come true.
Please email me today Kathleen@BeckHomeLoanPro.com or call
916-722-0395 to get started on your dream of home ownership.
A person you can count on.
West Coast Mortgage Group
Sacramento, CA 95818