Do you want to buy a home in Champaign County, but have a limited income or low credit? You may be discouraged thinking that owning a home is impossible. But there are options for homebuyers in your position.
FHA loans are one option. FHA loans are insured by the Federal Housing Administration. These mortgage loans provide opportunities for buyers with less-than-perfect credit or limited down payments to purchase homes, but they aren’t without potential pitfalls.
A minimum 3.5% down payment is required for FHA loans, and you need a credit score of at least 580. They’re a popular option for first-time home buyers.
The FHA insures mortgages issued by banks and credit unions. If the borrower defaults, the lender is protected, which is why the terms are more favorable than a traditional mortgage.
How Can an FHA Loan Be Used?
If you are interested in refinancing a single-family home, buying a single-family home, purchasing a condo or multifamily home, or purchasing a mobile or manufactured home, an FHA loan may be the best option for you. There are some types of FHA loans that can be used for renovations or for new construction.
How is an FHA Loan Different from a Conventional Loan?
An FHA loan is easier to qualify for than a conventional mortgage. You might qualify for a loan with a lower credit score, and your mortgage insurance payments might be lower too.
You also have fewer restrictions regarding using gifts from family or donations as down payments.
The down payment is 3.5% if you have a FICO score of at least 580. If your FICO score is between 500 and 579, you’ll need to make a 10% down payment and purchase mortgage insurance. The debt-to-income ratio can’t be greater than 43%, whereas a conventional loan usually has a 36% ratio. You do need to have proof of income and steady employment, as you would need with a conventional loan.
Do FHA loans have a maximum amount?
FHA-guaranteed loans have a maximum loan amount. In 2020, these ranged from $331,760 to $765,600. The limit amounts are updated by the FHA each year based on fluctuations in home prices.
FHA Loan Benefits
Buying a home with an FHA loan offers buyers the opportunity to own a home while making a lower down payment than they might otherwise be able to afford. FHA loans can also cover some closing costs. If you have problems making payments on an FHA loan you may be eligible for a forbearance period if you qualify.
The Downsides of an FHA Loan
A mortgage insurance premium is required upfront with an FHA loan to protect the lender. Fees are due at closing and are 1.75% of your loan amount. A mortgage insurance premium must also be paid annually for the life of the loan. Mortgage insurance premiums range from 0.45% up to 1.5%.
A home you buy with an FHA loan must meet strict health and safety standards.
Although the FHA has set standards, approved lenders can set their own requirements.
Applying for an FHA Loan
If you want to get one of these loans, you must first find an FHA-approved lender. Some documents are required, such as proof of U.S. citizenship, legal permanent residency, or eligibility to work in the United States. You’ll need bank statements for at least the past 30 days, and you’ll probably need to show pay stubs.
Information such as credit reports, tax returns, and employment records may be obtained by your lender on your behalf.
FHA loans are advantageous because they allow more people to become homeowners than conventional loans. In light of the less stringent approval requirements, it is vital that you fully understand the costs of this loan, and that you do not take on more than you can handle.
If you’re considering your options, it is always best to consult with a mortgage loan officer, and I work with three of the best in the Champaign area! Pat Schilling at Busey Bank, Danny Stites at Midland State Bank, and Adam Hodge at Molitor Financial Group. To learn more about each of these wonderful lenders and view their contact information, click here.
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