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You may by ready to move out of your apartment and buy a place of your own in Washington state, but providing a huge down payment and bumps in your credit score may make purchasing a home seem out of reach.
We have some news for you! Homeownership may be closer than you think. A home financing program called an FHA home loan has had a recent change to its minimum credit score requirements and the program can help you over the hurdle of paying a large down payment. In this post we’ll share the details of an FHA home loan, the minimum credit score to qualify, and how it can be helpful to you.
What is an FHA home loan and how is it useful?
An FHA home loan is a loan program that is backed by the government and supported by the Federal Housing Administration. The FHA falls under the Department of Housing and Urban Development or HUD and was created in the mid 1930’s amongst the Great Depression to help foster the construction of new homes and boost employment rates. FHA loans are still extremely popular today.
FHA loans are designed to help first-time homebuyers and are accommodating for today’s buyer. One of the major benefits of an FHA loan is the down payment requirement. For an FHA loan you can use a down payment that is as low as 3.5%, unlike the standard 20% down payment of a Conventional loan. The only drawback of using a down payment that is lower than 20% is that you will most likely need to pay mortgage insurance. And recent changes have been made to mortgage insurance premiums. However, as soon as you have built up enough equity in your new home you may have the option to refinance into a Conventional home loan where you would no longer need to pay mortgage insurance.
Another benefit of an FHA home loan is that there are more lenient parameters around the debt-to-income eligibility. FHA loan requirements don’t limit the debt-to-income ratio to 43% like a Conventional loan, which could be helpful for today’s homebuyer when so many Americans are paying off student loans.
A low down payment, but what about my credit score?
An FHA home loan not only gives homebuyers a break on having to front a huge down payment, but the program can also be forgiving on credit score requirements. While credit requirements can vary from lender to lender, the FHA has recently made changes to the eligible credit score that has made the home loan even more accessible for homebuyers. With a down payment of 3.5% the minimum credit score is 580. And with a down payment of 10% the minimum credit score is 500. This is comparable to the 600 credit score minimum needed for a Conventional home loan.
Check your credit score to see if you could meet the eligibility terms. There are three credit bureaus that you can use to find your FICO credit score; those are Experian, TransUnion, and Equifax. Look over your credit report for accuracy and take action to make any needed corrections or improvement.
Even if your credit score meets the minimum requirement, we recommend doing your best to increase it because your credit score is a valuable factor in determining your mortgage interest rate. You can build your credit by paying down any balances that you have on your current credit cards and by not opening any other lines of credit or loans. Improving your credit score is something that takes time so make sure you factor that into your timeline before applying for home financing if you need to.
What else do I need to know about FHA loan eligibility in Washington state?
Besides lower credit scores and down payment amounts there are a few more eligibility perks worth knowing about on an FHA loan in Washington state. The FHA loan limit raised for King, Pierce, and Snohomish counties in 2019. The new limit for the Seattle area is $726,525. This means that the maximum amount that you can borrow using an FHA home loan in the Seattle area is $726,525, which is beneficial because home prices are so high in the area.
An FHA loan also allows the borrower to use gift funds to supplement with their down payments. As long as you contribute 3.5% of the down payment amount from your own funds you are able to use money that was given to you from family or relatives to increase your down payment amount and in return lower your monthly mortgage payment. Like any other loan product or program, proper documentation will be needed to explain the purpose and intention of the gift funds.
Your credit score will play into the interest rate that you will receive on your mortgage financing, however, with an FHA you can most likely expect a lower interest rate than a Conventional loan so you can plan on keeping more money in your pocket each month.
The FHA eligibility terms are also more forgiving when it comes to the time period you have to wait before applying for home financing after declaring bankruptcy. The waiting period is two years after filing for bankruptcy versus four years with a Conventional home loan.
Last but not least, the home that you are applying for home financing for needs to be your primary residence. Unfortunately, FHA home financing does not apply to second homes or investment properties.
Could an FHA loan be the right fit for me?
There you have it, all of our highlights on the FHA loan program, credit score requirements, and other eligibility guidelines that we think will be the most helpful for you. If you have any questions or think you may be ready for a place of your own, check out our first time home buyers guide and contact us today! We have been part of the mortgage industry since 1992 and are sure that we will find the best mortgage program and product to fit your situation so you can step into your new home with confidence.
