5 Major Myths About FHA Loans
With so much data available, it's truly a great time in world history to be in the market to buy a home.
Aside from the fact that interest rates are highly affordable - and have been that way for a number of years now - there’s a ton of information about the process of purchasing a house. Thanks to the internet, never before has so much information been so easy to discover.
Still, there’s also a tremendous amount of disinformation out there. It's true in just about every aspect of life, even when it comes to certain mortgage types, such as those backed by the Federal Housing Authority, which are more commonly referred to as FHA loans. Who knows the reason why, but it may be due to the fact that the program has been around for so long - since the mid-1930s - and certain aspects of it have changed over the years.
Whatever the reason, if you're considering applying for an FHA loan, but aren't sure whether it's right for you due to mixed information, the following will help you set the record straight:
Myth No. 1: You need a sterling credit score to be approved
Everyone wants a high credit score. It gives you a greater number of options in terms of loan availability and can also help you borrow more.
But the notion that FHA loans require a perfect score is plain wrong. As noted by Forbes, people who have a credit score as low as 580 may still qualify for an FHA loan. Generally speaking, those with lower scores tend to pay more in terms of interest, but this isn't the same as eligibility.
Bottom line: You can have a very average credit score and still be extended an offer. Lenders take many different factors into account beyond only credit, such as what you earn, what funds you have available, how long you've been employed and several other financial considerations.
Myth No. 2: FHA loans are not available to self-employed people
The benefits of self-employment are innumerable, which may explain why 44 million workers in 2019 - nearly 30% of the country's workforce, according to Forbes - worked for themselves at one point or another during that 12-month period.
The ease with which self-employed people can obtain an FHA loan isn't one of those benefits, or so they say. As noted by FHA.com, while loan approval does tend to be a bit tougher, this reality is not unique to FHA loans. Many lenders have resources available at their websites, which provide details on what self-employed individuals should have with them to corroborate their financial ability. For instance, instead of a W-2 form, 1040 tax returns, must be obtained. These should include all schedules.
Your lender will want to see a few other items, but again, self-employment is not by any means a dealbreaker for FHA loan approval. Nor has that ever been the case. Just ensure that you have a paper trail, as transparency helps to increase communication and the understanding your lender needs to come to decision on what is right for you and your budget.
Myth No. 3: FHA loans are exclusive to single-family home purchases
Nothing could be further from the truth in this regard. While single-family residences are the most popular among buyers, you can apply and be approved for an FHA loan if you're interested in obtaining a condo. The same is true for multifamily units. Although housing starts fell in March and April due to the economic impact of the shutdown, multifamily permits actually rose by nearly 5% between February and March, according to the National Association of Home Builders.
Myth No. 4: You don't need mortgage insurance with an FHA loan
While some loan products don't require you to obtain mortgage insurance, an FHA loan does, despite what you may have been led to believe.
It's structured differently in terms of payment arrangement. For instance, in addition to paying the premium over time in a given year - usually on a monthly basis - there is also an upfront premium. This means a certain percentage of the policy is due at closing. The terms and conditions may differ, however, depending on the loan agreement.
Myth No. 5: FHA loans are only for first-time buyers
While there is truth to the notion that these mortgages are ideal for people who have never been in the market before, you can apply if this isn't your first purchase, too. They're also available to those who want to refinance their current loan.
This is hardly an exhaustive list, so if you have more questions, please let us know at RMS. We'll be happy to clear things up to separate fact from fiction.