Lenders offer a variety of loans to choose from when purchasing a Ventura home. The three most common loans are conventional, VA, and FHA. For credit-challenged buyers, an FHA loan may be their most viable option.
FHA Loan Explained
Government Backed Loan
These loans are insured by the government. However, the government does not, in fact, actually issue any money for loans. What does that mean? Well with conventional loans, the lender assumes all of the risk. But with government-backed loans, the lender receives protection in case the buyer defaults on their loan. That is why their terms tend to favor those home buyers on the lower end of the credit spectrum.
Lower Minimum Credit Score
Typically, lower credit scores mean higher interest rates. An extremely low score may mean an outright rejection of your mortgage loan. Fortunately, FHA loans tend to favor those with lower credit scores. Currently, a 580 credit score may help you get approved. For comparison, conventional loans tend to require buyers with at least a 620 credit score. However, even though the FHA only requires a 580 minimum, lenders may still expect a higher score to qualify. Ideally, you need to whip your credit into the best shape possible before you apply. This not only improves your chances of approval but can also save you hundreds of dollars a month on your mortgage payment.
Higher Debt-to-Income Allowed
Your debt-to-income ratio also factors into whether or not a lender approves your loan. For FHA loans, lenders want to see the total of your debts (including your mortgage payment) to equal no more than 50% of your income. With a conventional loan, lenders want the debt-to-income ratio at or below 36%.
Mortgage Insurance
All FHA lenders require buyers to pay PMI (private mortgage insurance) for the life of the loan regardless of their credit score or down payment amount. However, the percentage of the PMI depends on the terms, value, and amount of down payment. A higher down payment may snag you a lower percentage for PMI. The only way to avoid PMI with an FHA is by refinancing to a conventional loan or paying the loan off completely.
These cover the main points of an FHA loan. We strongly recommend speaking at length with your lender about all of your loan options before deciding on one. Make sure you ask for clarification on any questions that may arise.
Dave & Pat Zumbrun, your Ventura County real estate specialists
