Last Updated on June 9, 2021 by Maggie Sutton
Have you been considering buying a home, but a bad credit score or a lack of money for a down payment have been holding you back? The FHA Home Loan has been helping more and more educators become homeowners due to its less restrictive credit score and minimal down payment requirements. In this post, we explain how you can break through your financial barriers to become a homeowner with a FHA Home Loan for educators.
What is an FHA loan?
FHA stands for Federal Housing Administration. A FHA home loan is a loan insured by the Federal Housing Administration and distributed by an approved lender. Congress created the FHA during the Great Depression to jumpstart the housing market.
FHA Home Loans are designed for buyers who have lower credit, have low to moderate incomes, do not have a lot of money for a down payment, or all the above. While we all know educators deserve to be paid their weight in gold, that’s generally not the case. That’s what makes FHA loans for educators a particularly fitting home loan option. In fact, borrowers can get up to 96.5% of their total home value and only need to pay a 3.5% down payment.
Pros and Cons to FHA Loans for Teachers
Advantages of FHA Loans
Educators around the country can get all the following advantages with FHA home loans:
- Smaller down payments – FHA home loans require a smaller down payment compared to conventional home loans. Borrowers only pay 3.5%-10% of their total home loan as their down payment. On a $250,000 house, 3.5% is $8,750, compared to $50,000 for a 20% down payment typically paid on conventional loans.
- Flexible qualification guidelines – The criteria to qualify for FHA loans are not as strict as you find with conventional loans, meaning most teachers, principals, professors, and other educators can qualify. The main requirements with FHA loans is a good work and credit history.
- Lower credit scores – FHA offers a chance at loans to people who have a credit score as low as 580. Sometimes, credit scores as low as 500 are accepted, depending on the lender. If you have a credit score under 580, your down payment will be 10% instead of 3.5%.
- Assumable – FHA loans are assumable, so if you want to buy a house from someone who has not finished paying their loan, you can take over their payments instead of getting a new FHA loan.
Disadvantages of a FHA Home Loan
While all those advantages make the FHA home loan seem like a great option, there are a few things to note about FHA loans:
- There is an Upfront Funding Fee that needs to be paid when you close on the loan. This fee is typically around 2% of the amount financed, but you can in some instances roll this fee into your financing.
- Mortgage Insurance Premiums (MIP) – All FHA home loans for educators must include MIP for the life of the loan. The current rate for MIP is 0.85%, and this payment is typically rolled into your monthly mortgage payments. MIP protects the mortgage lender in case you are unable to pay the loan back. This insurance is a big reason why home buyers with lower credit scores and less cash to put down for a down payment still have the ability to purchase a house.
Because of the upfront funding fee and MIP, FHA home loans generally cost more over their life than a conventional loan. But, if you really want to buy a home and have financial barriers, FHA home loans are a way to achieve homeownership.
If you get your credit up, find a lower interest rate, or gain equity in your home, you can always refinance to a conventional loan. As long as you put at least 20% down when you refinance, you’ll get rid of all the fees.
FHA Home Loans vs. Conventional Home Loans
While there are some disadvantages to a FHA home loan, there are still many advantages over conventional loans.
- Educators looking to get a FHA loan must have a credit score of at least 580. It can be less (down to 500) if you want to have a higher down payment. On the other hand, to get a conventional home loan, you usually must have a credit score of 640 and above.
- Down payments for conventional loans range between 3% to 20%, depending on your credit score. Down payments on FHA loans, however, are between 3.5% to 10%. Keep in mind that the lower your credit score, the higher the down payment for FHA Loans.
- FHA loans and conventional loans also differ in length of terms. FHA home loans offer terms in 15 or 30 years, while you can pay a conventional loan in 10, 15, 20, or 30 years. But, the shorter the term, the higher your monthly payments will be since the total loan amount doesn’t change.
- 100% of the down payment can be a gift when you apply for the FHA home loan. But, only part of the down payment can be a gift with a conventional home loan. You will need to provide documentation of the gift to your lender.
How to Qualify for a FHA Home Loan
To qualify for a FHA home loan, you need to fulfill the following requirements:
Have Verifiable Income
Your lender will need to see your tax returns and pay stubs to confirm your employment. They will need to verify that you have been working for at least the last two years, although it does not need to be for the same employer. If you have been an educator in two different schools or districts, that is no problem. On the other hand, you will possibly not qualify for the loan if you worked in a different field in the same 2 year period. If you are new to the workforce, remember that some lenders will take into account your student teaching experience, if you have any.
Be Able to Afford Payments
You must be able to comfortably pay your home loan and other debts you may have. The general rule when determining mortgage affordability is that your mortgage should not be more than 35% of your total wages before taxes. Your total debt, including the mortgage and also any car loans, student loans, credit card debt, etc., should not be not more than 48% of your total earnings.
If that cannot work with your income, you will need to work and reduce your debts before buying a home. You can also look at homes in a lower price range since the mortgage will be lower.
Save for Down Payment
Before you get the loan, you will need to save at least 3.5% of the value of your home. If your credit score is less than 580, you will need to pay 10% as your down payment. There are also many other costs at closing that you will need to prepare for financially to close on your home.
FHA home loans do allow you to use a gift for 100% of the down payment. That means that if a family member or friend is giving you the money for a down payment, they are allowed to pay for all of it. With other types of loans, a gift is restricted to paying only part of the down payment.
If you plan to have a gift for your down payment, let your mortgage lender know. You’ll need to fill out paperwork to verify that this is a gift you don’t have to pay back.
Establish Credit History
Your lender will have to pull a credit check to establish what your credit score is. If you do not pay your debts regularly and on time, you are unlikely to be approved for a home loan. Make sure that all your bills are paid on time to ensure that your loan is approved.
The minimum FICO credit score to get an FHA home loan is 580. If you have a credit score lower than 580, ensure that your lender accepts that score. If you do not know your credit score, you can use online resources to look it up. Legally, you are allowed to check your credit score once a year from each of the three main credit reports without it hurting your credit score.
Keep in Mind Home Value
FHA home loans have strict guidelines on the amount you can borrow with the loan. This is to ensure that low to moderate income earners can pay their mortgages back. FHA loan limits range from $356,362 to $822,375 and vary county to county.
The house you are taking a loan out for also has to meet strict health and safety standards. This is to ensure that the house will not become condemned and possibly force you to default on your loan. You will be required to pass an inspection on your potential house to show to your mortgage lender and the FHA that the house is not in danger of any hazards.
Educators Can Save More For FHA Loan Costs
Homes for Heroes mortgage specialists work with FHA home loans for educators, and provide significant savings on their lending fees to educators like you. When you use a Homes for Heroes lending specialist, you can save $500 on lending fees. Plus, you can save $150 on title services and $50 on a home inspection. Our lending specialists are well versed in FHA home loans, and understand their requirements.
In addition, when you use a Homes for Heroes real estate specialist to buy your home, you’ll receive Hero Rewards. Our Hero Rewards are our way of saying thank you for being an educator. After your closing, you’ll receive your Hero Rewards check worth .7% of your purchase price, or $700 for every $100,000. On average, our savings come out to $2,400 per hero.
To get started, sign up today and Homes for Heroes will connect you with specialists in your area. Those specialists will be able to answer your questions, discuss whether the FHA home loan or another type of loan is right for you, and put you on the right path toward home ownership.