Banks consider their interests first and protect them by not lending to people they considers poor risks. What constitutes a "poor risk" varies from lender to lender, but the general gist would be anyone whose credit score is 619 or less. Other attributes, such as income level, length of time in current dwelling, and previous loan history all factor into a private lender's decision. As always, the more anyone does notneed the money, the higher the degree of likelihood the bank will lend to that person.
Kentucky FHA Loans
Mortgages that come from the Federal Housing Administration are easier to get than private mortgages, but they will usually have a higher interest rate over the long haul than private mortgages. The FHA has its root during Franklin Roosevelt's administration during the Great Depression. Thousands upon thousands of Americans had either lost their homes in the debacle or were about to lose them. Shorn of their credit rating and nearly penniless, they had no hope of qualifying for loans even if the banks were in a position to lend, which many were not.
The FHA oversaw the lending of money to these desperate people and insured the debts, which contributed to the overall consumer confidence, the lack of which had contributed to the economic devastation of the Great Depression. In the modern era, the practice of the FHA is to oversee the lending money to people who have at least a 500 credit score.
If the person's credit score is from 500-579, then the person must put 10 percent down. If the person's credit score is from 580-619, then the person must put down 5 percent. This is in contrast to standard mortgage loans where the person is allowed, in certain circumstances, to put down as little as 3 percent.
The Mortgage Insurance Difference on for FHA and Conventional Loans in Kentucky
There are three key differences:
Standard mortgages require you to have personal mortgage insurance, or PMI, if the homeowner has less than 20 percent equity in the home.
Standard mortgages require only PMI. FHA loans require borrowers to have two kinds of insurance: the up front mortgage insurance premium, or UFMIP, and the mortgage insurance premium, or MIP.
The cost of PMI is tied to a borrowers credit score whereas FHA insurance is not.
While FHA insurance remains the same cost regardless of a borrower's debt-to-income ratio, it is the more expensive of the two options. Still, the less expensive standard PMI is unavailable to borrowers whose credit is lower than 620. Also, PMI ismore expensive when a borrower's credit is between 620 and 680. A borrower is allowed to cancel PMI before the expiration of the term, too, whereas an FHA borrower is not allowed to do so.
In both standard and FHA loans, the insurance in question protects the lender more than the borrower. Basically, it's there to make sure the lender gets paid in the case of a default. Remember, even though the FHA is a government program, the money comes from private lenders. The FHA insurance makes it more palatable for those lenders to lend to people without good credit because it protects them from loss.
The Final Word
When borrowing money for a mortgage, the borrower should carefully weigh the pros and cons of each kind of mortgage before proceeding. Of course, with solid credit, good income, and a good payment history, it probably wouldn't be necessary to take out an FHA loan, but every case is different, and borrowers should consider all options before "signing on the dotted line."
Conventional vs. FHA vs. VA loans
|CONVENTIONAL LOANS||FHA LOANS||VA LOANS|
|Minimum Credit Score||620||500 with 10% down; 580 with 3.5% down||No minimum score|
|Loan Limits||$548,250 to $822,375 for conforming loans||$356,362 to $822,375 for single-family homes||No loan limits|
|Down payment Minimum||3%||3.5%||No down payment required|
|Extra Fees||PMI required with down payment of less than 20%||Upfront mortgage insurance of 1.75% and ongoing fee of 0.45% to 1.05%||Upfront funding fee of 1.4% to 3.6%|
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