Last Updated on May 13, 2021 by Maggie Looker
As a law enforcement official, being near the community you serve is important. That’s why owning a home in the neighborhood you serve just makes sense. But coming up with the credit score or down payment requirements of conventional loans might seem far off. Luckily, there are FHA home loans for law enforcement that require a smaller down payment and lower credit score. Let’s see if a FHA home loan is a good option for you to buy in your desired location.
What is a FHA home Loan?
FHA stands for Federal Housing Administration. A FHA home loan is a loan insured by the Federal Housing Administration and given by an approved lender. After the Great Depression, Congress created the FHA in 1934 as a way to revamp the slumped housing industry. Their goal was to stimulate the housing market and to give more Americans a chance at owning a home. This organization continues to help many Americans own a home and could do the same for you.
Borrowers can get up to 96.5% of their total home value and only need to pay a 3.5% down payment. These loans are designed for low to moderate-income earners who also have low credit scores and are generally looking for mortgages with a lower minimum down payment. That’s what makes FHA loans the perfect mortgage loan for first time home buyers, although anyone can be approved for a FHA loan. FHA loans can also be used in every state in the nation.
Pros and Cons to FHA Loans for Law Enforcement
Advantages of FHA Loans
Law enforcement officials around the country can get 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. It’s suggested that you put down 20% when using a conventional loan. On a $250,000 home, that’s a difference of $41,250!
- Flexible qualification guidelines – The qualification criteria are not as strict as you find on conventional loans. This means most police, corrections, and law enforcement professionals can qualify. The main requirements with FHA is a good work and credit history.
- Lower credit scores – FHA offers loans to people who have a low credit score and cannot get a loan from conventional lenders.
- 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 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:
- Upfront funding fee: There is an Upfront Funding Fee of 2.25% of the total financed amount, paid when you close on the loan. *Note: this is an update from the above video
- Mortgage Insurance Premiums (MIP) – All FHA home loans for law enforcement must include MIP for the life of the loan. The current rate for MIP is 0.85% of the loan, 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. Think of it as extra insurance that you’ll pay your loan back, as the bank is taking a risk giving you the money. This insurance is a big reason why home buyers with lower credit scores and smaller down payments still have the ability to purchase a house.
Generally, a FHA loan will cost a home buyer more money over the term of the loan versus other home loans such as a conventional loan, VA loan or USDA loan due to the higher interest rate and MIP costs. But, it still allows you to get the home you want for you and your family!
FHA Loans vs. Conventional Loans
While there are some disadvantages to a FHA Loan, there are still many advantages over conventional loans. Conventional mortgage loans are the most common type of home mortgage loan, accounting for over 50% of home mortgages.
- People in law enforcement or corrections looking to get a FHA loan must have a credit score of at least 580 to get a mortgage with a down payment of 3.5%. 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 and 10%. Bear in mind that the lower your credit score, the higher your down payment must be for FHA Loans.
- FHA loans and conventional loans also differ in length of terms. FHA loans offer 15 or 30 years, while you can pay a conventional loan in 10, 15, 20, or 30 years.
- Down payment assistance programs are available for FHA loans, but not conventional loans.
- 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. *Note: 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
To qualify for a FHA home loan, you must have verifiable income. Your lender can verify by looking at your tax returns and pay stubs. 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 in law enforcement in two different jurisdictions, that is ok. On the other hand, you will possibly not qualify for the loan if you worked in another sector in the last two years. For example, if you were a teacher last year and in law enforcement this year, your chances might be smaller to be approved. That is because loan officers want to make sure that you are in a secure profession.
Be Able to Afford Payments
You must be able to comfortably pay your home loan and other debts you may have. The general rule is that your mortgage should not be more than 35% of your pre-tax total wages. Your total debt (including car loans and student loans) should also not be not more than 48% of your total earnings. If those numbers are lower than your current finances, you need to reduce the total you owe before being approved.
Save for a Down Payment
Before you’re approved, you will need to have at least 3.5% of the purchase price as a down payment. If your credit score is less than 580, you will most likely need to pay up to 10% of the home value as your down payment. There are also many other costs at closing that you will need to prepare for financially. Your mortgage lender will be able to give you a list with costs before closing.
Establish Credit History
Your lender will have to check your credit history. If you do not pay your credit cards, student loans, or other debts regularly and on time, you are unlikely to get a 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 a FHA home loan is 580, but bear in mind that your individual lender might require a higher credit score. If you have a low credit score, ensure that you check that your preferred lender accepts that score.
If you do not know your credit score, you can use online resources to look it up. Every American is allowed to check their credit score from each of the three main credit reporters once a year for free without it damaging your credit. This is a great way to see any issues before you talk to a loan specialist. Fixing those errors will boost your credit.
Keep in Mind Home Value
FHA loans have strict guidelines on the amount you can borrow with the loan. The price range of the home will vary county by county, but FHA loan limits range from $356,362 to $822,375. This doesn’t mean you can’t purchase a home for more than this amount. You will just need to come up with the difference in home price either with another loan or with cash.
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 need to do 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.
How Law Enforcement Professionals Can Offset FHA Loan Costs
Homes for Heroes mortgage specialists work with FHA home loans for law enforcement and provide significant savings on their lending fees to law enforcement professionals like you. In addition, you will receive Hero Rewards savings valued at 0.7% of the home purchase price after your closing when you use a Homes for Heroes real estate specialist to purchase your home. That’s how law enforcement professionals like you can save an average of $2,400 on the purchase of your new home.
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.