FHA Loans Help Buyers with Bad Credit

If you have bad credit, an FHA loan may help you achieve your dream of homeownership.

FHA loans help buyers with bad credit

Recently, FHA (the Federal Housing Administration) lowered the baseline credit requirement necessary to qualify for a home loan. In addition to helping buyers who have a few dings on their credit report — as well as buyers who have not established their credit rating — this lending program offers a number of other significant benefits.

What Is an FHA Loan?

The FHA loan program is similar to many other types of mortgages. The difference is the loans are guaranteed against default by the Federal Housing Administration.

A private mortgage lender makes the loan to the buyer, but the FHA guarantee means that if the borrower defaults, the FHA will pay off the balance to the lender.

Benefits of an FHA Loan

The primary benefit of this program is that many potential home buyers can qualify for an FHA loan even if they have a low credit score (FICO score, formerly known as Fair, Isaac & Co.).

With even a moderate credit score, borrowers may qualify for a 3.5 percent down payment. These programs generally have low-interest rates and you can choose between a fixed or an adjustable interest rate.

On the downside, the maximum loan amount is based on your credit score and the FHA guidelines for your area. In Juab County, for example, the most you can borrow under this program is $324,300. Salt Lake, Wasatch and Summit Counties all have slightly higher maximums, whereas Uintah and some of the less-populous counties have a max loan amount of $275,665.

How Do You Qualify for an FHA Loan?

The FHA lending guidelines dictate that if your FICO score is below 580, you need 10 percent down to close your loan. If your score is above 580, you may qualify for a 3.5 percent down payment.

Theoretically, FHA loans do not have a minimum credit score requirement. However, it may be safe to assume that having a credit score below 500 will likely prevent you from qualifying for a loan. But the guidelines allow lenders to make some exceptions to this rule.

Depending on what the FHA maximum loan amount is for your area, having a higher FICO score may allow you to borrow a larger amount — as long as your debt-to-income ratio fits the program guidelines.

To pre-qualify for your loan, you must provide the lender with basic information relating to your income, assets and debt.

Never assume that you can’t get a home loan until you talk to a mortgage lender. They often have programs available that can help even the most credit-challenged buyer get into a home.

In Orem, Intercap Lending helps first-time home buyers and buyers with poor or no credit qualify for a mortgage. Contact us today to learn whether an FHA loan may be the answer to your bad credit situation.