Last Updated on February 15, 2021 by Maggie Sutton
Have you been considering buying a home but a less than perfect credit score, or a lack of savings for a down payment has been holding you back? In this post, Homes for Heroes explains how you can break through those issues with FHA Home Loans for teachers. The FHA Home Loan has been helping more teachers become homeowners due to its less restrictive credit score and minimal down payment requirements.
What is an FHA loan?
FHA stands for Federal Housing Administration. An FHA home loan is a loan insured by the Federal Housing Administration and given by an approved lender. To revamp the housing industry and give more Americans a chance at owning a home, Congress created the Federal Housing Administration in 1934 to stimulate the housing market after the Great Depression. 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/or are generally looking for mortgages with a lower minimum down payment.
Pros and Cons to FHA Loans for Teachers
Advantages of FHA Loans
Educators 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.
- Flexible qualification guidelines – The qualification criteria are not as strict as you find on conventional loans, and most teachers, principals, professors, and others in education can qualify. The main requirements with FHA is a good work and credit history.
- Lower credit scores – FHA offers a chance at 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 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:
- UPDATE TO VIDEO: There is now an Upfront Funding Fee of 2.25 percent of the total financed amount paid when you close on the loan.
- Mortgage Insurance Premiums (MIP) – All FHA home loans for teachers must include MIP for the life of the loan. The current rate for MIP is 0.85 percent 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.
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 Home Loans vs. Conventional Home Loans
While there are some disadvantages to a FHA home loan, there are still many advantages over conventional loans.
- People in the education sector 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% to 10%. Bear 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.
- 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. You will need to provide documentation of the gift to your lender.
How to Qualify for a FHA Home Loan
To qualify for an FHA home loan, you need to fulfill the following requirements:
Have Verifiable Income
To qualify for an FHA home loan, you must have a verifiable income. Your lender will need to see your tax returns or pay stubs to confirm this. 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 a teacher in two different schools or districts, that is ok. On the other hand, you will possibly not qualify for the loan if you worked as a nurse, for example, in the same 2 year period.
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 total wages before taxes, and your total debt (including car loans and student loans) 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 the total amounts you owe before buying a home.
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 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 to close on your home.
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 an FHA home loan is 580, but bear in mind that your 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.
Keep in Mind Home Value
FHA home loans have strict guidelines on the amount you can borrow with the loan. The home price range for an FHA approved loan will vary county by county, but FHA loan limits range from $356,362 to $822,375.
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.
Teachers Can Offset Some FHA Loan Costs
Homes for Heroes mortgage specialists work with FHA home loans for teachers and educators, and provide significant savings on their lending fees to teachers like you. In addition, you will receive Hero Rewards savings valued at 0.7% of the home purchase price after you close on your new home when you use a Homes for Heroes real estate specialist to purchase your home. That’s how teachers 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.