Are you considering buying a home in the beautiful state of Kentucky? Securing a mortgage loan is a crucial step in the homebuying process, and one of the key factors lenders evaluate is your credit score. Understanding the credit score requirements for mortgage loan approval in Kentucky can help you prepare and improve your chances of securing financing for your dream home.
Your credit score is a numerical representation of your creditworthiness based on your credit history. Lenders use this score to assess the risk of lending to you. A higher credit score typically indicates lower risk to lenders, making you more likely to qualify for a mortgage loan and secure better terms and interest rates.
While specific credit score requirements can vary among lenders and mortgage programs, there are some general guidelines to consider when applying for a mortgage loan in Kentucky.
If your credit score is below the desired threshold for a mortgage loan, don’t despair. There are steps you can take to improve your creditworthiness over time:
In Kentucky, credit score requirements for mortgage loans can vary depending on the type of loan and lender you choose. While higher credit scores generally improve your chances of loan approval and favorable terms, there are loan programs available for borrowers with less-than-perfect credit.
Before applying for a mortgage loan, it’s essential to review your credit report, understand your credit score, and take steps to improve it if necessary. By demonstrating responsible financial behavior and maintaining a good credit history, you can increase your likelihood of securing a mortgage loan and achieving your homeownership goals in Kentucky.
| Loan type | Credit score minimum |
|---|---|
| Conventional loan | 620 or 660 depending on program |
| FHA loan | 580 (or 500 with a minimum 10 percent down payment) |
| VA loan | No official requirement, but typically 620 |
| USDA loan | No official requirement, but typically 640 |
Fannie Mae and Freddie Mac each back conventional loans with a lower minimum credit score: 620 and 660, respectively. Both of these loans require just 3 percent down.
The Federal Housing Administration (FHA) insures FHA loans, which allows mortgage lenders to accept a credit score as low as 580 with a 3.5 percent down payment, or 500 with a 10 percent down payment.
If you’re a military member, a veteran or married to someone who has served in the armed forces, you could benefit from a VA loan backed by the U.S. Department of Veterans Affairs. You don’t have to meet a specific credit score minimum to qualify, although many lenders do require at least 620.
If you have a lower income and want to buy a home in a particular rural area, look into a USDA loan. While not a hard-and-fast rule, most USDA-approved lenders require a minimum credit score of just 640.
American Mortgage Solutions, Inc.
10602 Timberwood Circle
Louisville, KY 40223
Company NMLS ID #1364
Text/call: 502-905-3708
fax: 502-327-9119
email: kentuckyloan@gmail.com
Just like the gas prices at the pump, mortgage rates can change daily or throughout the day. Typically mortgage rates are published at 10-11 am daily by most lenders and you can lock up through the close of business which is usually around 6-7 PM. Mortgage rates can change up or down throughout the day based on various financial, economics, and geopolitical news in the US Financial markets and World markets. Generally speaking, good economic news is bad for rates and vice versa, bad economic news is good for mortgage rates.
The good news is this: Once you find a home and get it under contract, you can lock your mortgage loan rate. Typically it takes about 30-45 days to close a mortgage loan in Kentucky, so the typical lock is for 30-60 days. If rates get better you may be able to negotiate a better rate with your lender, but they usually have to improve by at least 25 basis points (.25) to do that. Not all lenders offer this option. The longer you lock the loan, the greater the costs. It is usually free to lock in a loan for up to 90 days without having to pay a fee.
What a lot of lenders are experiencing now is that some loans don’t close on time for various reasons. You can always extend the lock on the loan but it will costs you usually .125 basis points to do so. If you let the lock expire on the loan, then you have to take worse case pricing on that day when you go to relock. It is usually best to extend the lock on your loan.
When applying for a mortgage loan, lenders will pull what they call a “tri-merge” credit report which will show three different fico scores from Trans union, Equifax, and Experian. The lenders will throw out the high and low score and take the “middle score” For example, if you had a 614, 610, and 629 score from the three main credit bureaus, your qualifying score would be 614. Most lenders will want at least two scores. So if you only have one score, you may not qualify. Lenders will have to pull their own credit report and scores so if you had it ran somewhere else or saw it on a website or credit card you may own, it will not matter to the lender, because they have to use their own credit report and scores.
Most lenders will pull your credit report for free nowadays so this should not be a big deal as long as your scores are high enough.
The Secondary Market of Mortgage loans offered by FHA, VA, USDA, Fannie Mae, and KHC all have their minimum fico score requirements and lenders will create overlays in addition to what the Government agencies will accept, so even if on paper FHA says they will go down to 580 or 500 in some cases on fico scores, very few lenders will go below the 620 threshold.
If you have low fico scores it may make sense to check around with different lenders to see what their minimum fico scores are for loans.
The lenders I currently deal with have the following fico cutoffs for credit scores:
FHA–580 minimum score
VA—-580 minimum score
Fannie Mae–620 minimum score
USDA–620 minimum score
KHC with Down Payment Assistance –620 minimum score.
As you can see, 580-620 is the minimum score with most lenders for a FHA, VA, or Fannie Mae loan, is required for the no down payment programs offered by USDA for Kentucky for First Time Home Buyers wanting to go no money down.
The most popular programs for Kentucky First Time Home Buyers usually involves one of the following housing programs outlined in bold below:
FHA:
FHA will allow a home buyer to purchase a house with as little as 3.5% down. If your credit scores are low, say 680 and below, a lot of times it makes sense to go FHA because everyone pays the same mortgage insurance premiums no matter what your score is, and the down payment can be gifted to you. Meaning you really don’t have to have any skin into the game when it comes to down payment.
They even allow down payment assistance for down payment requirements of 3.5% through eligible parties like Kentucky Housing, Welcome Home Grants and Louisville KY and Covington Kentucky Down Payment Grants.
Lastly, FHA will allow for higher debt to income ratios with sometimes getting loan pre-approvals up to 55% of your total gross monthly income. So if you have a debt to income ratio of over 50%, Fannie Mae will not do the loan and USDA usually likes their debt to income ratios no more than 45%.
Think back to the last time you financed a purchase — be it a home, automobile, or what have you… You may remember having heard the term “debt-to-income ratio.” Today I want to spend some time going over exactly what this ratio is, and to also touch on how it can effect your personal finances.
Commonly referred to as your “DTI,” your debt-to-income ratio is a personal finance benchmark that relates your monthly debt payments to your monthly gross income.
As an example… Let’s say that your gross monthly salary is $5,000 and you are spending $2,800 of it toward monthly debt payments. In that case, your DTI would be an unhealthy 56%.
This version of your DTI is sometimes referred to as your “back-end” DTI. This is often broken down further to give a front-end debt-to-income ratio, which is a component of your back-end DTI.
Your front-end DTI is calculated by dividing your monthly housing costs by your monthly gross income. Front-end DTI for renters is simply the amount paid in rent, whereas for homeowners it is the sum of mortgage principal, interest, property taxes, and home insurance (i.e., your PITI) divided by gross monthly income.
From above, if that $2,800 in debt payments is attributable to $1,500 in housing costs and $1,300 in non-housing costs, then your front-end DTI is $1,500/$5,000 = 30% (and your back-end ratio is still 56%, as calculated above).
Fannie Mae:
Fannie Mae requires just 3% down with their new Home Possible Program, but if you use their traditional mortgage loan, then 5% is the Fannie Mae Standard. Fannie Mae will go down 620 score, but if your scores are below 680, I would look seriously at the FHA loan program because Fannie Mae has steep increases to the interest rate and the mortgage insurance premiums if your scores are low.
A couple of good things about Fannie Mae is that you can buy a larger priced home and have a large loan amount due to FHA only allowing most Kentucky Home Buyers a maximum mortgage loan amount of $356,000 for a max FHA loan and $545,000 for Fannie Mae Conventional loans in Kentucky for 2020.
Lastly when it comes to mortgage insurance, FHA mortgage insurance premiums are for life of loan while Fannie Mae mortgage insurance premiums drop off when you develop 80% equity position in your house.
But as a tell most people, nobody has a loan for 30 years, and the average mortgage is either refinanced or home sold within the first 5-7 years.
VA Loans-
VA loans offer eligible Veterans and Active Duty Personnel to buy a home going no money down with no monthly mortgage insurance. This is probably the best no money down loan out there since the rates are traditionally very low on comparison to other government insured mortgages and no monthly mortgage insurance. The VA loan can be used anywhere in the state of Kentucky with the maximum VA loan limit being removed for 2021
USDA Loans-
USDA loans offer people buying a home in rural areas (typically towns of $20k or less) to buy a home going zero down. You cannot currently own another home and there is household income limits of $90,200 for a household family of four, and up to $119,300 for a household of five or more. You search USDA website for eligible areas and household income limits below at the yellow highlighted link :
KHC or Kentucky Housing-
Kentucky First Time Home Buyers typically use KHC for their down payment assistance. KHC currently offers $10,000 for down payment assistance and sometimes throughout the year they will offer low mortgage rates on their mortgage revenue bond program.
The down payment assistance usually never runs out because you have to pay it back in the form of a second mortgage. It helps a lot of home buyers that want to buy in urban areas that cannot utilizer the USDA program in rural areas. Most of the time the first mortgage is a FHA loan tied with the 2nd mortgage fore down payment assistance. All KHC programs require a 620 score and rates are locked for 45 days.
FHA and VA are the easiest on previous bankruptcies. FHA and VA both require 2 years removed from the discharge date on a Chapter 7. If you are in the middle of a Chapter 13, FHA will allow for financing with a 12 month clean history payment to the Chapter 13 courts, and with trustee permission.
VA requires 2 years removed from a foreclosure (sheriff sale date of home) and FHA requires 3 years.
USDA requires 3 years removed from both a foreclosure and bankruptcy, but on the foreclosure they do not go off the sale date. This may save you a little time if you had a previous foreclosure.
Fannie Mae (Conventional Loan)
Fannie Mae is by far the strictest. They require 4-7 years out of a foreclosure or bankruptcy
If you have questions about qualifying as first time home buyer in Kentucky, please call, text, email or fill out free prequalification below for your next mortgage loan pre-approval.
Joel Lobb
Senior Loan Officer
(NMLS#57916)
Text or call phone: (502) 905-3708
email me at kentuckyloan@gmail.com
http://www.mylouisvillekentuckymortgage.com/
The view and opinions stated on this website belong solely to the authors, and are intended for informational purposes only. The posted information does not guarantee approval, nor does it comprise full underwriting guidelines. This does not represent being part of a government agency. The views expressed on this post are mine and do not necessarily reflect the views of my employer. Not all products or services mentioned on this site may fit all people
CONFIDENTIALITY NOTICE: This message is covered by the Electronic Communications Privacy Act, Title 18, United States Code, §§ 2510-2521. This e-mail and any attached files are deemed privileged and confidential, and are intended solely for the use of the individual(s) or entity to whom this e-mail is addressed. If you are not one of the named recipient(s) or believe that you have received this message in error, please delete this e-mail and any attached files from all locations in your computer, server, network, etc., and notify the sender IMMEDIATELY at 502-327-9770. Any other use, re-creation, dissemination, forwarding, or copying of this e-mail and any attached files is strictly prohibited and may be unlawful. Receipt by anyone other than the named recipient(s) is not a waiver of any attorney-client, work product, or other applicable privilege. E-mail is an informal method of communication and is subject to possible data corruption, either accidentally or intentionally. Therefore, it is normally inappropriate to rely on legal advice contained in an e-mail without obtaining further confirmation of said advice.
How to qualify for a Kentucky mortgage
The type of mortgage you’re applying for determines the minimum requirements you’ll have to meet for your down payment, credit score, and debt-to-income ratio.
Find out what type of loan you might qualify for or what aspects of your finances you’ll need to improve to get a better shot at qualifying for a mortgage.
Loan Type Min. Down Payment Min. Credit Score Max DTI Property Type Conventional 3% 620 45% Primary, secondary, investment VA 0% none none Primary FHA 3.5% 500 50% Primary USDA 0% none 41% Primary Keep in mind: The minimum down payment, minimum credit score, and maximum DTI shown in the table apply to mortgages used to purchase a primary residence. While you can use a conventional loan or a jumbo loan to purchase a home for another purpose, you might need a larger down payment, a higher credit score, more cash reserves, or all three.
Credit score needed to buy a house
Mortgage lending is risky, and lenders want a way to quantify that risk. They use your three-digit credit score to gauge the risk of loaning you money since your credit score helps predict your likelihood of paying back a loan on time. Lenders also consider other data, such as your income, employment, debts and assets to decide whether to offer you a loan.
Different lenders and loan types have different borrower requirements, loan terms and minimum credit scores. Here are the requirements for some of the most common types of mortgages.
Conventional loan
Minimum credit score: 620
A conventional loan is a mortgage that isn’t backed by a federal agency. Most mortgage lenders offer conventional loans, and many lenders sell these loans to Fannie Mae or Freddie Mac — two government-sponsored enterprises. Conventional loans can have either fixed or adjustable rates, and terms ranging from 10 to 30 years.
You can get a conventional loan with a down payment as low as 3% of the home’s purchase price, so this type of loan makes sense if you don’t have enough for a traditional down payment. However, if your down payment is less than 20%, you’re required to pay for private mortgage insurance (PMI), which is an insurance policy designed to protect the lender if you stop making payments. You can ask your servicer to cancel PMI once the principal balance of your mortgage falls below 80% of the original value of your home.
FHA loan
Minimum credit score (10% down): 500
Minimum credit score (3.5% down): 580
FHA loans are backed by the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development (HUD). The FHA incentivizes lenders to make mortgage loans available to borrowers who might not otherwise qualify by guaranteeing the federal government will repay the mortgage if the borrower stops making payments. This makes an FHA loan a good option if you have a lower credit score.
FHA loans come in 15- or 30-year terms with fixed interest rates. Unlike conventional mortgages, which only require PMI for borrowers with less than 20% down, all FHA borrowers must pay an up-front mortgage insurance premium (MIP) and an annual MIP, as long as the loan is outstanding.
VA loan
Minimum credit score: N/A
VA loans are mortgages backed by the U.S. Department of Veterans Affairs (VA). The VA guarantees loans made by VA-approved lenders to qualifying veterans or service members of the U.S. armed forces, or their spouses. This type of loan is a great option for veterans and their spouses, especially if they don’t have the best credit and don’t have enough for a down payment.
VA loans are fixed-rate mortgages with 10-, 15-, 20- or 30-year terms.
Most VA loans don’t require a down payment or monthly mortgage insurance premiums. However, they do require a one-time VA funding fee, that ranges from 1.4% to 3.6% of the loan amount.
USDA loan
Minimum credit score: N/A
The U.S. Department of Agriculture guarantees loans for borrowers interested in buying homes in certain rural areas. USDA loans don’t require a minimum down payment, but you have to meet the USDA’s income eligibility limits, which vary by location.
All USDA mortgages have fixed interest rates and 30-year repayment terms.
USDA-approved lenders must pay an up-front guarantee fee of up to 3.5% of the purchase price to the USDA. That fee can be passed on to borrowers and financed into the home loan. If the home you want to buy is within an eligible rural area (defined by the USDA) and you meet the other requirements, this could be a great loan option for you.
What else do mortgage lenders consider?
Your credit score isn’t the only factor lenders consider when reviewing your loan application. Here are some of the other factors lenders use when deciding whether to give you a mortgage.
- Debt-to-income ratio — Your debt-to-income (DTI) ratio is the amount of debt payments you make each month (including your mortgage payments) relative to your gross monthly income. For example, if your mortgage payments, car loan and credit card payments add up to $1,800 per month and you have a $6,000 monthly income, your debt-to-income ratio would be $1,800/$6,000, or 30%. Most conventional mortgages require a DTI ratio no greater than 36%. However, you may be approved with a DTI up to 45% if you meet other requirements.
- Employment history — When you apply for a mortgage, lenders will ask for proof of employment — typically two years’ worth of W-2s and tax returns, as well as your two most recent pay stubs. Lenders prefer to work with people who have stable employment and consistent income.
- Down payment — Putting money down to buy a home gives you immediate equity in the home and helps to ensure the lender recoups their loss if you stop making payments and they need to foreclose on the home. Most loans — other than VA and USDA loans — require a down payment of at least 3%, although a higher down payment could help you qualify for a lower interest rate or make up for other less-than-ideal aspects of your mortgage application.
- The home’s value and condition — Lenders want to ensure the home collateralizing the loan is in good condition and worth what you’re paying for it. Typically, they’ll require an appraisal to determine the home’s value and may also require a home inspection to ensure there aren’t any unknown issues with the property.
Kentucky FHA loans can be an excellent option for first-time homebuyers and borrowers with lower incomes or less-than-perfect credit. They can also be an easy way to refinance. .
Features and benefits:
Purchase, rate/term, or cash-out refinance of a primary residence. Program terms available may vary based on the state or county in which the financed
property is located. Mortgage insurance is required.
CONSIDERATIONS: Important information will be provided to you in the disclosures you receive after we have received your application and the loan
documents you are provided at loan closing. Please consult your tax advisor regarding the deductibility of interest.
Contributions may have limitations based upon occupancy and loan to value ratios and cannot be used for purposes of down payment, reserve
requirement or meet minimum contribution requirements
Programs for qualified borrowers. All borrowers are subject to credit approval, underwriting approval and product requirements, including loan to
value, credit score limits and other lender terms and conditions. Fees and charges may vary by state and are subject to change without notice. Some
restrictions may apply. Not a commitment to lend. 11/22
In order to get an FHA loan to buy your next house, it’s a good idea to first check your credit score. That way, you can see what your maximum LTV would be through the FHA and decide whether an FHA loan might be right for you.
Depending on which FHA lender you’re working with, it may also be a good idea to get pre-qualified for an FHA loan. This can help you establish how much you’ll likely be able to borrow and what your interest rate may be.
Once you’ve identified a home you want to purchase and are ready to formally apply for your mortgage loan, you’ll need to choose an FHA-approved lender and work through its individual application and underwriting process. The application process will include completion of a Uniform Residential Loan Application.
As part of your application, you’ll also need to get an appraisal for the home you’re buying, so your lender can ensure your loan won’t violate FHA’s LTV limits. From there, you’ll need to work through your individual lender’s underwriting process, which will include showing proof of income, running credit checks and demonstrating that you can afford your down payment.
Some of the documentation you’ll likely need to supply for underwriting include:
After you complete your lender’s application process and underwriting, your lender can formally approve your loan and you can close on your home.
FHA loans don’t have stated income maximums or minimums, but are generally designed to benefit low- to moderate-income Americans who would have trouble qualifying for conventional financing or affording the down payment required by other loans.
Some potential cases when FHA loans can be particularly helpful include:
There are more than a dozen home loan programs available through the FHA. Many of these programs are ideal for different borrowers in a variety of circumstances, offering everything from 30-year fixed-rate mortgages to adjustable rates, improvement loans, refinancing solutions and even reverse mortgages.
Some of the most popular FHA loan programs are:
Most conventional mortgages require down payments of at least 20% of a home’s purchase price in order to avoid paying private mortgage insurance, along with minimum credit scores of 620 to 640 in order to qualify. With private mortgage insurance (PMI) that helps homeowners pay their mortgage if they lose their jobs, some lenders require lower down payments.
FHA loans have two types of built-in mortgage insurance that allow borrowers to buy homes with as little as 3.5% down—or 10% if they have bad credit. In addition, these loans allow homebuyers to qualify for lower interest rates than they would get with conventional mortgages, all because their loans are federally insured.
| FHA Loan | Conventional Mortgage | |
| Minimum credit score | 500 | 620 |
| Minimum down payment | 3.5% if your credit score is 580 or higher; 10% for scores under 580 | 20% to avoid mortgage insurance |
| Maximum loan term | 30 years | 30 years |
| Mortgage insurance requirement | Two types of mortgage insurance required | Required if down payment is under 20% |
The Federal Housing Administration (FHA) was created in the 1930s in response to the Great Depression to help Americans who couldn’t otherwise afford the dream of homeownership.
Today, the FHA continues to help Americans through more than a dozen loan programs that help Americans with low incomes or bad credit qualify for lower interest rates than they would otherwise get, and buy homes with much smaller down payments than those required by conventional lending tools. The FHA does this by working with approved lenders to insure loans across the country and by building two types of mortgage insurance into all of the loans that it insures.
So, if you have poor credit or are struggling to save for a down payment, you may want to consider using an FHA loan for your next home purchase.
Joel Lobb
Mortgage Loan OfficerIndividual NMLS ID #57916
American Mortgage Solutions, Inc.
Louisville, KY 40223Company NMLS ID #1364
click here for directions to our office
Text/call: 502-905-3708fax: 502-327-9119
email:
https://www.mylouisvillekentuckymortgage.com/
The Federal Housing Administration (FHA) Mortgagee Letter (ML) 22-17 announced that FHA’s Technology Open To Approved Lenders (TOTAL) Mortgage Scorecard will begin scoring a borrower’s positive rental payment history as part of the credit risk analysis when they are applying for FHA-insured financing.
TOTAL will begin scoring on or after October 30, 2022, as well as for case numbers assigned on or after September 20, 2021, allowing lenders to implement the guidance on existing pipeline cases without the need to obtain a new case number.
Here’s what you need to know about Kentucky FHA Loans and the changes that have been made for 2022.
It stands for a Federal Housing Administration loan, meaning it is backed by the U.S. government. It is not made by a government agency. You deal directly with a mortgage lender or broker to get the loan, but the FHA will typically buy the loan from the lender after it is made or guarantee the lender against loss. FHA loans typically require lower down payments and credit scores than most conventional loans, making them a clear favorite among first-time buyers.
These loans can have terms of either 30 years or 15 years. The interest rate is fixed for the entire loan length.
FHA borrowers are required to pay mortgage insurance premiums, but after a borrower’s equity in their home increases they may be able to refinance into a conventional loan and eliminate the monthly mortgage insurance premiums.
To qualify for an FHA mortgage, home buyers need a FICO credit score of 580 or higher and a down payment of 3.5% (or a minimum down payment of 10% with a 500 FICO score).
These loans also require a two-year employment and income verification and the property as must be used as a primary residence.
If a borrower has had a bankruptcy, they must wait one to two years depending on if Chapter 13 or Chapter 7 before applying and three years after a foreclosure.
In 2022, for most parts of the U.S., Kentucky FHA borrowers can take out a loan for up to $420,680, an increase from 2021’s limit of $356,362.
Is an Kentucky FHA loan right for you?
Here are some benefits of Kentucky FHA loans 🤩
✅ Low down payment options
✅ Down payment assistance programs available
✅ Higher DTI ratios acceptedFHA requires you to establish that the income is in fact stable. I am covering Time on Job, Part Time Income, Seasonal Income and Job Gaps below.Time on JobThere is not a minimum length of time a borrower must have held a position for the income to be eligible. However, the application must identify the most recent 2 years of employment.If the borrower’s employment history indicates that they were in school or in the military, then the borrower must provide evidence supporting this such as college transcripts or discharge papers.The current type of employment has to be supported by the college transcripts or discharge papers showing that he borrower’s training enabled them to gain employment in their field of training.Part Time Income
Part-time and second job income can be used to qualify if documentation is obtained to prove that the borrower has worked the part-time job uninterrupted for the past two years, and plans to continue.For Qualifying purposed, “part-time” income refers to jobs taken to supplement the borrower’s main income from regular employment, such as a second job that is less than 40 hours per week.Income: Is averaged over the previous 2 years. If there was a pay rate increase and we can document the increase in pay, you can average the new pay rate over 12 months.Seasonal IncomeSeasonal income may be acceptable for qualifying. It is not unusual to have out-of-season income from unemployment income. If the borrower has a 2 year history and continuance is probable, this type of income may be allowed to qualify the borrower.The key here is history and continuance.Job GapsThe borrower must provide a signed explanation for gaps in employment as follows:Income can be considered effective if the following can be verified:1. Borrower has been employed in the current job for at least six months at the time of the case number assignment AND2. A two year work history prior to the absence from employment.What does FHA stand for?
FHA stands for Federal Housing Administration, and the FHA is a government agency that insures mortgages. It was created just after the Great Depression, at a time when homeownership was prohibitively expensive and difficult to achieve because so many Americans lacked the savings and credit history to qualify for a loan. The government stepped in and began backing mortgages with more accessible terms. Approved lenders began funding FHA loans, which offered more reasonable down payment and credit score standards.
Today, government-backed mortgages still offer a safety net to lenders—because a federal entity (in this case, the FHA) is guaranteeing the loans, there’s less financial risk if a borrower defaults on their payments. Lenders are then able to loosen their qualifying guidelines, making mortgages available to middle and low income borrowers who might not otherwise be approved under conventional standards.
What’s the difference between FHA and conventional loans?
Home loans fall into two broad categories: government and conventional. A conventional loan is any mortgage that is not insured by a federal entity. Because private lenders assume all the risk in funding conventional loans, the requirements to qualify for these loans are more strict. Generally speaking, FHA loans might be a good fit if you have less money set aside to fund your down payment and/or you have a below-average credit score. While low down payment minimums and competitive interest rates are still possible with a conventional loan, you’ll need to show a strong credit score to qualify for those advantages.
Each loan type has advantages and disadvantages—including different mortgage insurance requirements, loan limits, and property appraisal guidelines—so choosing the one that works best for you really depends on your financial profile and your homebuying priorities.
FHA loans pros and cons
FHA loans are meant to make homeownership more accessible to people with fewer savings set aside and lower credit scores. They can be a great fit for some borrowers, particularly first time homebuyers who often need lower down payment options, but you should weigh the costs and benefits of any mortgage before committing. Here’s a breakdown of the key pros and cons when it comes to FHA loans:
Pros Cons Low down payment. Down payments make up the majority of cash to close in any purchase loan, and saving up for one can be a significant barrier for some borrowers. FHA loans make it possible to put down as little as 3.5% upfront and still get competitive rates. Mandatory MIP payments. FHA loans are more lenient, but they also come with insurance costs to mitigate risk to the lender. You’ll have to pay Mortgage Insurance Premiums (MIP) no matter what—either for 11 years or for the life of your loan, depending on your down payment. Lower credit score. Credit scores can be a major hurdle when it comes to conventional loans, but borrowers with credit scores starting at 500 can qualify for FHA loans. Less competitive. Sometimes sellers can be more hesitant to accept FHA loans. In a competitive market, you might not win out against conventional loan bids. Higher DTI accepted. Your debt-to-income (DTI) ratio gives lenders an understanding of other major financial obligations in your life. This ratio is a key factor in any loan application because it indicates your ability to afford a mortgage based on current household income and existing debt. Again, FHA loans offer more leniency here and borrowers at or below 43% DTI can qualify. Stricter property standards. To offset risk and further protect lenders, FHA loans have strict criteria when it comes to assessing the condition of any property being purchased with an FHA loan. The downside? The house you want to buy might not qualify for an FHA loan. The upside? You’re less likely to be financially burdened by a home that requires expensive repairs or updates. No income limitations. It’s a common misconception that FHA loans are only available to first-time homebuyers or borrowers with limited income—but they’re not. There’s no maximum income limit that would disqualify you from this type of loan. Loan limits: FHA loan limits are typically lower than conventional loan limits, which means you might not be able to get funding for more expensive houses. This isn’t necessarily a bad thing, since it helps ensure that borrowers get loans they can afford to repay. How to qualify for an FHA loan
Qualifying for an FHA loan is generally easier than qualifying for a conventional loan, but you’ll still need to meet some basic minimum standards set by the FHA. While the government insures these loans, the funding itself comes through FHA-approved lenders each lending institution may have slightly different qualifying guidelines for its borrowers. Keep in mind that, while these FHA standards offer a basic framework, you’ll need to confirm the individual qualifying rules with your specific lender.
Credit score minimum 500. Your exact credit score will play a big role in determining your down payment minimum; typically, the higher your credit score, the lower your down payment and the more favorable your interest rate.
Debt-to-income ratio at or below 56.9%. DTI is a standard way of comparing the amount of money you earn to the amount you spend paying off other debts, and FHA loans are more lax on this number.
Steady income and proof of employment. Being able to provide at least 2 years of income and employment records is a standard requirement for all loans.
Down payment between 3.5%-10%. The down payment minimum for an FHA loan is typically lower than conventional loan, and can be as little as 3.5% depending on your credit score and lender.
Property standards apply. You won’t qualify for an FHA loan if the house you want to buy doesn’t pass the appraisal process, which is more strict with this type of loan than conventional mortgages.
Maximum FHA loan amount. The amount of money you borrow cannot exceed the FHA loan limits; this number changes based on your county and is determined by how expensive the local market is; the maximum FHA loan limit in 2021 is $420,000 (check HUD resources to confirm the latest limits.)
Joel Lobb
Senior Loan Officer
(NMLS#57916)American Mortgage Solutions, Inc.
10602 Timberwood Circle, Suite 3
Louisville, KY 40223text or call my phone: (502) 905-3708
email me at kentuckyloan@gmail.comThe view and opinions stated on this website belong solely to the authors, and are intended for informational purposes only. The posted information does not guarantee approval, nor does it comprise full underwriting guidelines. This does not represent being part of a government agency.
The views expressed on this post are mine and do not necessarily reflect the view of my employer. Not all products or services mentioned on this site may fit all people. NMLS ID# 57916, (http://www.nmlsconsumeraccess.org). Mortgage loans only offered in Kentucky.
All loans and lines are subject to credit approval, verification, and collateral evaluation and are originated by lender. Products and interest rates are subject to change without notice.Kentucky FHA, VA, USDA & Rural Housing, KHC and Fannie Mae mortgage loans.
Kentucky FHA Mortgage Lender 