Can FHA Interest Rates Change Based on Credit?
FHA loans are government-backed loans that are made to purchase or refinance homes. A borrower must meet minimum requirements to qualify for an FHA loan. However, if these minimum requirements are met, all FHA borrowers are eligible for the same interest rates. Therefore, if a borrower meets the requirements described below then credit will not impact the interest rate. However, credit scores can impact the amount of money that one can borrow.
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FHA Loans
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The FHA, or the Federal Housing Administration, loans have been around since 1934. The FHA is part of HUD, or Housing and Urban Development. FHA loans are insured by the government. This allows lenders to give better deals since these loans become much less risky for them due to the government backing. FHA loans allow for small down payments. The percentage of down payment required fluctuates with the current lending market. The FHA was offering financing for up to 96.5 percent of the purchase price as of September 2011. FHA also allows for easy credit qualifying that allows many first-time homeowners to purchase more easily than traditional loans.
FHA Credit Score Requirements
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As of October 2010, the FHA allowed borrowers with a credit score above 580. Borrowers with a credit score between 500 and 580 are eligible for financing up to 90 percent of the value of their home. FHA uses the middle score of the three credit scores pulled by the credit bureaus, Experian, Equifax and TransUnion. As of September 2011, borrowers with a middle score below 500 were not eligible for FHA financing. It is important to note that these numbers are constantly changing.
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No credit or bad credit
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Borrowers with little or no credit may still be eligible for FHA loans. Two lines of credit are the requirement for FHA loans. However, if a borrower does not have two lines of credit he may often use substitute credit. Examples of substitute credit are: rental history, cell phone payment history or utility payment history. Borrowers who have filed Chapter 7 bankruptcy are eligible for FHA loans two years after the bankruptcy discharge. Additionally, borrowers who have been consistently paying on Chapter 13 bankruptcy for at least a year are also eligible. If a potential borrower has late payments or collections on her credit report, an FHA underwriter may still approve a loan if these late payments are situational and not a consistent pattern.
FHA Rates and Benefits
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FHA rates are therefore consistent for borrowers who meet all of the minimum requirements. The loan-to-value ratio may change based on credit history. FHA loans are very popular because they offer higher loan amounts, oftentimes closing costs are lower and qualifying is often easier than traditional loans. In light of the mortgage crisis that began in 2008, FHA loans were even more prevalent due to the security of a government-backed loan.
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References
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