Using FHA Loans To Purchase New Home With Bad Credit

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This ARTICLE On Using FHA Loans To Purchase New Home With Bad Credit Was PUBLISHED On July 31st, 2020

FHA Loans To Purchase New Home With Bad Credit is the best choice when qualifying for a home loan with bad credit.

  • Over 40% of homebuyers use FHA loans when they purchase a home
  • HUD, the parent of FHA, is the government agency that sets guidelines on FHA home mortgages
  • HUD is not a lender
  • It is a government agency that insures and partially guarantees lenders if borrowers default and foreclose on their FHA loans
  • Due to the government guarantee, lenders can offer FHA loans with only a 3.5% down payment and a 580 credit score
  • HUD’s role and mission are to promote homeownership to first time home buyers and home buyers with less than perfect credit
  • Homebuyers with prior bad credit and lower credit scores can now have a chance to buy a home
  • Homebuyers with a prior bankruptcy, foreclosure, deed in lieu of foreclosure, a short sale can qualify for an FHA loan after meeting the mandatory waiting period requirements

In this article, we will discuss and cover the benefits of FHA Loans To Purchase New Home With Bad Credit.

FHA Loans To Purchase New Home Versus Other Loan Programs

There are various mortgage loan programs for borrowers to choose from.

  • The loan officer will go over the best loan program available for borrowers
  • FHA loans are a very popular home mortgage program due to its lax lending guidelines
  • FHA loans are perfect for first time home buyers due to the low down payment requirements and lenient credit requirements
  • FHA requires a 580 credit score for borrowers to qualify for a 3.5% down payment home purchase FHA loan
  • Borrowers with under 580 credit scores and down to 500 FICO are eligible for FHA loans with a 10% versus a 3.5% down payment
  • Conventional loans are not government-backed home mortgages
  • The minimum down payment on conventional loans is 3% to 5%
  • The minimum credit score requirement on conventional loans is 620 FICO
  • VA loans are government loans that offer 100% financing with no down payment and no mortgage insurance premium
  • However, VA loans are only for active and/or retired members of the United States Armed Services with a certificate of eligibility (COE)
  • USDA Loans are government loans that offer 100% down payment
  • However, only select homes in certain rural areas are eligible for USDA financing

However, conventional mortgage rates are substantially higher for lower credit score borrowers than FHA loans.

Types Of Homes You Can Purchase With FHA Loans

Only owner-occupant primary residence homes are eligible for government loans. This holds true on FHA loans.

Here is the type of properties that qualify for FHA financing:

  • Detached single-family homes
  • Townhomes and PUDs (Planned Development Units)
  • Condominiums (FHA loans are eligible for HUD-Approved Condo Financing)
  • Two to four-unit multi-family homes

Second homes and investment properties cannot be financed with FHA and/or other government loans. If a condo complex is not FHA approved, HUD now allows FHA Spot Loans. FHA Spot Loans enables condo buyers to purchase a condominium unit in a condo complex that is not HUD-approved.

FHA Versus Conventional Loans

Conventional loans are ideal for homebuyers with higher credit scores, lower debt to income ratios, and higher down payment.

Below is a comparison between FHA versus Conventional Loans:

  • FHA allows a front debt to income ratios up to 46.9% and back end DTI of up to 56.9% to get an approve/eligible per automated underwriting system (AUS)
  • The maximum debt to income ratio allowed on conventional loans is 50% DTI
  • There is no front end debt to income ratio requirements on conventional loans
  • Both FHA and Conventional loans allow non-occupant co-borrowers
  • FHA requires non-occupant co-borrowers to be related to the main borrower by law, blood, or marriage
  • FHA allows non-occupant co-borrowers who are not related by the main borrower by blood, marriage, law but then the down payment requirements are 15% down payment versus a 3.5% down payment
  • There is no relationship requirement on blood, law, marriage on conventional loans
  • FHA requires a one time upfront 1.75% mortgage insurance PLUS a 0.85% lifetime annual mortgage insurance premium for the life of the 30-year fixed-rate mortgage loan
  • Conventional loans do not require any private mortgage insurance for borrowers with at least an 80% loan to value
  • Private mortgage insurance is required on conventional loans if the property has less than 20% equity
  • Private mortgage insurance can be requested to be canceled on conventional loans if the homeowner’s equity position in their home exceeds 20%

A loan officer can compare the benefits of using FHA loans versus conventional loans for a borrower.

HUD Agency Guidelines Versus Conventional Loans

Below is the list of HUD Agency Lending Guidelines On FHA Versus Conventional Loans:

  • 3.5% down payment with a minimum 580 credit score requirement on FHA loans
  • Conventional loans require 3% down payment for first time home buyers
  • Otherwise, it is a 5% down payment
  • First-time homebuyers are those who had no ownership in a home for the past three years
  • FHA requires a two year waiting period after Chapter 7 bankruptcy discharged date
  • Conventional loans require a four-year waiting period after Chapter 7 bankruptcy discharge, short sale, and foreclosure
  • HUD requires a three year waiting period after foreclosure, short sale, deed in lieu of foreclosure to qualify for FHA loans
  • Fannie Mae and Freddie Mac require a seven-year waiting period after a foreclosure to qualify for conventional loans
  • FHA and VA loans allow borrowers in Chapter 13 Repayment plan to qualify for home mortgages after making 12 months timely payments with Trustee Approval 
  • Chapter 13 Bankruptcy does not have to be discharged and needs to be a manual underwrite
  • There are no waiting period requirements after Chapter 13 Bankruptcy discharged date
  • Any Chapter 13 Bankruptcy that has not been discharged for at least 2 years needs to be manually underwritten
  • Manual underwriting guidelines apply

To qualify for a mortgage with a five-star national lender with no overlays on government and conventional loans, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at GCA Mortgage Group is available 7 days a week, evenings, weekends, and holidays.

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