To many, the discussion of houses can be sensitive as money is a huge element of it all. As everyone knows, the economy isn’t generous to everyone and many people struggle with barely keeping their heads above the water. With plenty of people working multiple jobs to stay afloat, one may ask if buying a house is still practical for the average Joe.
While it is true that funds don’t come easy for everyone and rent certainly isn’t getting cheaper by the day, home ownership isn’t impossibly far off. Thankfully, there are different types of home loans that cater to different kinds of individuals with varying credit profiles.
A good example is loans under the Federal Housing Administration. FHA loans are said to be kinder to a vaster reach of people because of how less stringent their requirements are. To better understand this, compare conventional and non-conforming loans to the aforementioned.
FHA loans are usually the go-to loan program of first-time home buyers and those whose credits scores are considered to be moderate to low—that being anything below 600. For better context, financial institutions and lenders alike resort to FICO to determine one’s rating. An individual’s score may range from 300 to 850, with 620 being a safe bet for commercial loans and 580 being a good enough rating for FHA.
To elaborate, qualifying for these loan programs call for different criteria and a borrower’s score may well dictate who can apply to which. As established earlier, many individuals looking at purchasing property for the first time opt to apply for FHA loans because the minimum score they’re able to accommodate is 500. Those who reach the 580 mark can be granted a loan with the minimum 3.5% down payment, while those whose scores are between 500 to 579 can still be extended a loan but will have to put in a 10% deposit.
Conventional loans are more strict in that only those whose FICO scores are at least 620 to 640 can be granted loans. Exactly why tons of people opt for the FHA loan program as they’re able to build home equity sooner. Both programs also vary in required amounts of down payments. Commercial lenders who give out conventional loans may require their borrowers to fork out a 5% to 20% down payment whereas FHA’s required deposit will depend on your credit rating.
While these two have very distinct differences from each other, it’s best to know that no one is better than the other. It is also important to know that these two loan programs have different demographics. People whose credit ratings make them qualify for conventional loans will be pleased to know that these traditional loans only demand for mortgage insurance up until 78% of the loan is paid for, whereas FHA loans require a PMI for the life of the loan.
The reasoning for this is because FHA loans are government-insured and are designed for people with more humble credit ratings. That said, requirements aren’t as stringent. As a result, more people qualify putting lenders at risk should these borrowers default. This is also exactly the reason why commercial loans are only able to extend loans to people whose FICO scores are high and tested.
All that said, going for an FHA loan is a safe option for those who are just starting out and would want to purchase a home sooner.
- Address to your place of residence (past two years)
- Social Security numbers
- Names and location of your employers (past two years)
- Gross monthly salary at your current job(s)
- Pertinent information for all checking and savings accounts
- Pertinent information for all open loans
- Complete information for other real estates you own
- Approximate value of all personal property
- Certificate of Eligibility and DD-214 (for veterans only)
- Current check stubs and your W-2 forms (past two years)
- Personal tax returns (past two years), current income statement and business balance sheet for self-employed individuals
Once these are complete, you may visit hud.gov and utilize their search box to look for an FHA-approved lender. Type in your city and state in the box that asks for a lender’s name should you not know anyone. You will be routed to a list of qualifying lenders. You will also be asked to fill out a Uniformed Residential Loan application form sooner in the process.
Applying for loans online are usually hassle-free and will save you plenty of time. Good luck!