FHA Loan Illinois
An FHA Loan Illinois is insured by the Federal Housing Administration and issued by a private mortgage lender. FHA loans are attractive to potential borrowers because they allow people to purchase homes with a small down payment and average credit score
Minimum Credit Score
Low Downpayment Low Credit Score
How does the FHA Loan Illinois work?
Because an FHA loan is sponsored through the government, they provide a special guarantee to lenders – if FHA borrowers fail to repay the loan, the FHA will reimburse the lender for the remaining principle. This guarantee allows lenders to offer appealing mortgage terms to those who are looking to secure funding with a small down payment or average credit score.
One of the main attractions of an FHA loan is the small down payment requirement, which can be as low as 3.5%. Because of this feature, it’s easier for borrowers to purchase a home. However, if you have more than 3.5% available, it is recommended to make a larger down payment to avoid paying more for interest.
Now, here’s the tradeoff: if borrowers make a down payment of less than 20%, lenders require borrowers to buy private mortgage insurance (PMI). PMI is a monthly premium that protects the lender if the borrower stops making payments. When borrowers apply for an FHA loan, lenders will calculate this premium into your loan estimate. Remember, PMI is only required if borrowers put down less than 20%, and it can usually be removed once your loan-to-value ratio reaches 80%.
What credit score do I need for an FHA loan in Chicago, IL?
According to the Federal Housing Authority, if borrowers are looking to make a down payment of 3.5%, borrowers must have a credit score of 580 or higher. Borrowers that have a credit score of 500-579 must make a down payment of 10% or more.
Who can qualify for an FHA Loan Illinois?
The Federal Housing Administration (FHA) makes the program accessible for anyone to apply. Since this mortgage is insured through the government, many lenders are willing to accept applicants. However, keep in mind, most lenders issue their own set of standards aside from the minimum FHA requirements.
Borrowers that qualify for an FHA loan are required to make a down payment as little as 3.5% and have a minimum credit score of 580. If borrowers have a credit score between 500 and 579 they must make a down payment of 10%.
FHA loans are popular and attractive to first-time homebuyers because of their low down payment flexibility and average credit score requirement. Many people turn to an FHA loan because they are unable to put 20% down on their first home.
Borrowers that have filed for bankruptcy in the past are still eligible to apply for FHA loans. However, they must be two years out of bankruptcy and have a record showing improved credit. Some exceptions can be made, but borrowers will have to show they’ve made substantial improvements and manage their money wisely.
What are the income requirements for an FHA loan?
To start, the FHA loan does not require a specific income value but still has financial requirements to be eligible. Borrowers will need to prove they will be able to pay back the loan in full before a lender will approve you. Lenders strongly consider your debt-to-income ratio, which compares your debts to monthly income. Lenders like to see your monthly income to be greater than the amount you spend on your monthly payments. Typically, lenders like to see a ratio of 31:43 percent.
For example, let’s say a borrower earns $3,000 per month. To meet ratio requirements, it would be best to keep monthly mortgage payments below $930 because it is 31% of $3,000. Do not forget to factor in other financial obligations, such as credit card debt, student loans, and other bills. It is recommended that all your combined monthly payments be less than $1,290 (because $1,290 is 43 percent of $3000).
Which is better for me, FHA, or a conventional loan?
The choice between an FHA or conventional loan is primarily based on your financial situation. A conventional loan is more suited for someone that has an above-average credit score and enough money for a down payment of 20%. Conventional loans are more appropriate for the purchase of larger homes because steady rates are more efficient for higher-priced mortgages.
Conventional loans come in two forms: conforming and non-conforming. Conforming loans follow terms and conditions that are issued by Fannie Mae and Freddie Mac. These two governmental sponsored entities (GSEs) purchase mortgage loans from lenders, package them into securities, and sell them to investors. Fannie Mae and Freddie Mac established requirements a borrower must meet to qualify for a loan, such as gross income, credit score, and down payment amount.
Mortgage loans that exceed Fannie Mae and Freddie Mac’s maximum loan amount are known as non-conforming or jumbo loans. Jumbo loans are not as common as conforming loans, which is why lenders can issue a higher interest rate.
Like mentioned before, if a borrower is looking to purchase a more expensive home, a conventional loan will provide more flexibility than an FHA loan. In most areas, FHA loans cap out around $330,000. If the home you are purchasing is above the FHA limit, a conventional loan will be more beneficial.
FHA loans are more suited for someone that cannot put down 20% or has an average credit score. They are also easier to obtain because the FHA guarantees the loan, meaning, lenders do not take on as much financial risk by loaning the money to borrowers. The government repays the lender for the borrower’s inability to finance if they default on the loan. This motivates lenders to offer competitive interest rates and approve more borrowers.
What is the interest rate for an FHA loan?
To find the best FHA interest rate, you will have to research and compare lenders to see who can offer the lowest. Interest rates can fluctuate daily and it is important to keep open communication with your loan officer to get locked in at the lowest rate.
FHA interest rates are also determined by a few personal factors, such as your credit score, debt-to-income ratio, and down payment amount.
If you have a good credit score, your lender can offer you a better interest rate. This will help prevent you from paying thousands of dollars just in interest. In addition, your current credit score will determine the minimum amount needed for your down payment.
Your debt-to-income ratio is also evaluated to determine an interest rate for your mortgage. You can lower the amount of debt you have by paying off as much as you can before you apply. Having debt won’t deny you from approval, but you will have to prove it is well managed and not delinquent.
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Neighborhood Loans was great to work with or getting a home mortgage. This team was really quick to respond to any questions that came up, were constantly looking for better rates and on top of all issues that arose. Getting a mortgage is a lot of work. If you are looking for a mortgage broker for purchasing a home, I recommend Neighborhood Loans. They will make the process smooth and look out for your best interests. - Laurel M.
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