The first is that you'll need a down payment of at least 10%. Second, when you qualify with such a low score, it's considered a high-risk loan. Because the government backs FHA lenders against losses should a borrower fail to meet their obligations, lenders can approve individuals with 500 FHA lenders may be more lenient with their qualification criteria and can accept a lower down payment. Each state has different limits, so be sure to look in your state to find out what is available for your FHA home loan.
If you've previously lost a home to foreclosure, you'll have to wait three years before applying for an FHA loan. FHA loans, on the other hand, are non-conforming loans, meaning they don't meet Fannie Mae or Freddie Mac purchasing requirements. FHA home loans are open to first-time homebuyers, as well as regular buyers who plan to use the home as their primary residence. Whether you're buying a home for the first time or looking to refinance your current mortgage, the FHA loan program will allow you to finance a home with a credit score of 500 and a low down payment of between 3.5% and 10% to buy a home.
Low down payment requirements and competitive, low mortgage loan interest rates don't mean you can buy a mansion. The logic here is that if you have a more affordable payment, you're more likely to be able to stay at home and pay for it, which is good for the FHA. For the purposes of an FHA Streamline, that means no 30-day arrears in the last 6 months and only one 30-day late payment in the past year. If you buy a home for the first time, you may be able to combine an FHA loan with down payment assistance or closing costs from state programs for first-time homebuyers.
FHA borrowers also pay an annual mortgage insurance premium, which is based on the term (duration) of your mortgage, your loan-to-value ratio (LTV), the total amount of your mortgage, and the amount of your down payment. The FHA calls this its relationship between total mortgage payment and actual income, abbreviated as PTI for payment to income; you can also see that this is known as your initial debt ratio. The FHA does require that, if you convert the value of your property into cash, you leave at least 15% equity in your home. In addition, there must be at least 210 days between the first payment you make on your current loan and the first payment of the new rationalization.
Although you don't have to be a novice, FHA loans are often popular with first-time homeowners because they combine lower down payment requirements with more lenient standards for credit scores and existing debt.