Today the average person has many options when it comes to lending funds to buy a new house. One, the FHA mortgage, has been around the longest and is the most used one since 1934, but here we will go through all your options when it comes to obtaining the means to finance your property.
The competition to the Federal Housing Administration (FHA) loan program are programs like the Fannie Mae, Freddie Mac, HomeReadyTM, Home Possible®, VA loans and USDA mortgages. And since “one size fits all” isn’t the case when it comes to mortgage programs, it’s smart to compare.
The VA loans are only eligible for the military and veteran applicants, and being limited like this, they cannot be used by other people. Furthermore, the USDA loans are only available in less densely populated areas and have severe income restrictions. The conforming and conventional loans like the Fannie Mae and Freddie Mac often demand higher credit scores making them harder to reach by people with slightly lower monthly incomes.
FHA Mortgage and Down Payment Comparisons
Each mortgage program differs in many things but the one thing that’s most important for people looking to lend money are the down payments.
Namely, the FHA mortgage has two options when it comes to down payments: People with credit scores of 580 or above need to pay 3.5%, while those with scores between 500 and 579 pay 10% in down payment. The conforming 97 programs require 3% down, while the other conforming and non-conforming financing require 5% or higher. The HomeReadyTM and Home Possible® need 3% in down payment while the VA mortgages and the USDA home loans have zero down required.
Judging by the comparisons, one will see that FHA loans require higher down payments than many of the other mortgage plans, but there are additional conditions to be taken into consideration: FHA is found to be the most useful and easy to get by people facing hurdles like modest incomes or credit challenges and it allows for the down payments to be gifted or borrowed from acceptable sources.
Seller’s Contribution Limits
If you have a limited budget, these contribution limits that each mortgage plan has, will make a huge difference when buying a house. This is why they are something to be definitely taken into consideration.
The conforming mortgage plans allow for 3% for 97 % mortgages, while the FHA mortgage buyers get a 6% limit, and the VA buyers get only 4%.
Loan Size Limitations
All the mortgage plans have their own limits when it comes to loan sizes and most of them and closely tied to housing prices in the local area.
The FHA mortgage has its limitations set by county or MSA (Metropolitan Statistical Area). For single-family residents, these limits range from $275,665 to $636,150 in most parts of the country. However, the ranges are tighter, meaning that the limits are higher in the states like Alaska, Hawaii, the US Virgin Islands and Guam and also they have stricter rules when it comes to duplexes, triplexes, and fourplexes.
The conforming mortgage plans along with the HomeReadyTM and Home Possible® have their limits ranging from $424,100 to $636,150 or even more in the high-cost areas. The VA plans although hold the same limits for 0% down payments, they can go higher if a down payment is included. And while the USDA has no limits set, the rest of the conforming and non-conforming vary to the guidelines of the lenders.
General Guidelines
There are several general guidelines that are different with each mortgage loan and can be of a great importance and something to pay close attention to.
Property Guidelines
When it comes to financing a non-traditional property, a condo, co-op, or a manufactured home you will find that the guidelines of the FHA loans aren’t as strict as the rest of the mortgage programs out there. With the FHA, you are allowed to apply for energy-related improvements or renovation costs in your loan as well.
FHA Mortgage credit score guidelines
The credit scores are what make people hesitant as to whether they make the right fit for a loan.
The FHA has their minimum set to 580 which is very helpful to applicants with limited credit histories, low incomes, or high account balances and with old derogatory entries. However, the FHA loans are not subprime mortgage plans and lenders are allowed to set higher minimum scores – 640 being the most common one.
The lenders of conforming and non-conforming loans have their minimum scores range from 620 to over 700 – depending on the program and the lender, while the VA and USDA have no minimum scores set, however, the lenders individually set cutoffs at 640.
The fact that borrowers with low credit scores aren’t charged with higher rates or mortgage insurance premiums acts as a relief to the budget of people who are users of the FHA or other government mortgages. This is because oftentimes the loan mortgage insurance is more expensive for borrowers with lower credit.
Qualifying Guidelines
According to statistics shown by the mortgage tracking firm Ellie Mae, FHA mortgage plans turn more flexible than the rest of the programs. For instance, the credit scores are set lower and there are fewer restrictions for people whose records show recent bankruptcy, foreclosure or short sale.
Numbers show that in August of 2016 the count for FHA approved loans was 687, while with the rest of the home loans were lower, 754 approved loans. According to the Ellie Mae reports, the debt-to-income ratios in FHA are more flexible than with the conventional borrowers, up to 45% compared to 34%.
When it comes to the HomeReadyTM and Home Possible® mortgage programs, they are considered to be flexible as well, because they allow for lenders to take into account incomes from the other occupants of the home, without the need for them to go on the mortgage or title.
The Right Applicant For an FHA Mortgage
If you fall under some of these categories below, then you should consider the FHA mortgage plan as the right one for you:
- Credit scores under 680
- Able to make a down payment of less than 5%
- Too high income to be considered eligible for the HomeReadyTM or Home Possible®
- Buying property in city area
- Not a military or a veteran for VA financing
- Plan on buying a multi-unit property but living in one unit
- History of recent bankruptcy, foreclosure or short sale
- Buying a fixer-upper
Considering Other Loans
Even though FHA holds many advantages over the rest of the mortgage programs, its main downside might be its mortgage insurance. The coverage can be expensive between the upfront 1.75 % premium, and the annual premium of 0.85 % for most loans. Also, an important thing to take into consideration is that the FHA insurance, regardless of your loan balance, never terminates.
If you are able to take a down payment of 5% or higher, and/ or you have an excellent credit score, other programs will probably cost less than an FHA home loan. Applicants that have high credit scores should also consider the HomeReadyTM or Home Possible® mortgage plans. Also, if you are eligible for other government-backed loans like USDA or VA, go through them first because in your situation their costs are likely to be lower.
Conclusion
At the end of the day, consulting with a mortgage lender might be the best if you are having doubts as to which plan suits your financial situation the most. Request quotes from all of them and make the most optimal choice for your own individual situation.
