One of the most popular loan programs we provide is FHA loans. These government-backed loans give consumers access to some of the most competitive rates and terms on mortgages. A lot of homebuyers overlook FHA loans though because they do not realize that they can make use of them. Let’s take a look at some common myths and misconceptions surrounding FHA loans.
1. FHA loans are only for first-time homebuyers.
When people hear the term “FHA loan,” they often think immediately about first-time homebuyers. It is true that FHA loans are commonly used by first-time homebuyers. It makes sense—they have a lot of features which make them ideal for consumers in that situation.
But FHA loans are not exclusively for first-time buyers. They can be used by others as well. If you are not able to qualify for a conventional loan, you may be able to get an FHA loan even if this is not your first home purchase.
2. If your credit score is low, you will not qualify for an FHA loan.
Actually, this could not be further from the truth. You can apply for an FHA loan with good credit, mediocre credit, or bad credit. You can even apply with no credit. Your income and recent payment history are usually considered more important.
3. You can apply for an FHA loan using stated income.
While stated income is acceptable when applying for some types of loans, for an FHA loan, you need to be able to document your income. Tax returns work for this, as do pay stubs. Your W2s are another option.
4. You cannot get an FHA loan if you declared bankruptcy.
That is not correct. You actually can get an FHA loan after a bankruptcy. In fact, it may be easier for you to qualify for an FHA loan than a conventional loan in circumstances like these.
If you do want to get approved for an FHA loan after bankruptcy, you will need to make sure that your payments since the bankruptcy have all been timely. Your goal is to prove you have turned over a new leaf.
5. If you are self-employed, you cannot apply for an FHA loan.
You may have no pay stubs to demonstrate your financial viability if you are self-employed, but you do have tax returns which you can use. Self-employment does not stand in the way of qualifying for an FHA loan.
6. The down payment for an FHA loan is 3%.
That was true before 2009, but not since. The down payment on an FHA loan may be 3.5% or higher, depending on your credit score and other factors which are evaluated when you submit your application.
7. You can only buy a single-family house with an FHA loan.
Actually, you are at liberty to purchase far more than that, so long as the property you are buying will be your primary residence. You can use an FHA loan for a condo, a modular home, a 2-4 unit multi-family home, a townhouse, a manufacture home, or any other qualifying property.
8. FHA loans are only for home purchase.
While FHA loans are commonly used for home purchase, there are other types of FHA loans available for other purposes as well. For example, if you want to make repairs to a home, you can take out a 203k loan. If you want to refinance an existing FHA loan into a new one, you can apply for an FHA Streamline Refinance. You also can use an FHA loan for a cash-out refinance.
Want to upgrade your home to make it more energy efficient? There is a special FHA program just for this purpose, called the Energy Efficient Mortgage Program (EEM). EEM can be used to add improvements to both existing and newly constructed homes. To qualify, these enhancements must meet a cost efficiency test (in other words, they should be able to pay for themselves over their lifetimes).
Now we have debunked some common myths about FHA loans. If you think that an FHA loan might be right for your needs, or if you simply want to ask a question, please contact HPI Financial at (650) 741-9797.