Last Updated on September 19, 2024 by Luke Feldbrugge
Being involved and understanding your community is something that police officers strive to do. To do that, buying a home in the community you serve makes sense. But, coming up with the credit score or down payment requirements to buy a home might seem unobtainable. Luckily, there are FHA home loans for police officers that require a smaller down payment and lower credit score. Whether you’re a first time home buyer or looking to buy again, let’s see if a FHA home loan is the right loan for you.
What is a FHA home Loan?
FHA stands for Federal Housing Administration. A FHA home loan is a loan insured by the Federal Housing Administration and distributed by an approved lender. After the Great Depression, Congress created the FHA in 1934 as a way to reflate the housing industry. Their goal was to stimulate the housing market and to give more Americans a chance at owning a home. This organization continues to help many Americans own a home and could do the same for you.
These loans are designed for low to moderate-income earners who also have low credit scores and are generally looking for mortgages with a lower minimum down payment. That’s what makes FHA loans the perfect mortgage loan for first time home buyers, although anyone can be approved for a FHA loan. FHA loans can also be used in every state in the nation.
Borrowers can get up to 96.5% of their total home value with these loans, and only need to pay a 3.5% down payment. On a $250,000 home, that would make your down payment only $8,750. For a conventional loan, it’s recommended that you put 20% down, which would be $50,000. That’s a difference of $41,250!
Pros and Cons to FHA Loans for Police Officers
Advantages of FHA Loans
Police Officers can benefit from all the advantages FHA home loans offer including:
- Small Down Payments – FHA home loans require a smaller down payment compared to conventional home loans. Borrowers only pay 3.5%-10% as their down payment.
- Flexible Qualification – The qualification criteria are not as strict as you find on conventional loans. The main requirements with FHA is a good work and credit history.
- Lower Credit Requirements – FHA offers loans to people who have a lower credit score and may not qualify for a loan from conventional lenders.
- Assumable – FHA loans are assumable, so if you want to buy a house from someone who has not finished paying their loan, you can take over their payments instead of getting a new FHA loan.
Disadvantages of a FHA Loan
While all those advantages make the FHA home loan seem like a great option, there are a few things to note about FHA home loans:
- Upfront Funding Fee: There is an Upfront Funding Fee of 2.25% of the total financed amount, paid when you close on the loan. This covers the administrative costs of creating your loan.
- Mortgage Insurance Premiums (MIP) – All FHA home loans for police officers must include MIP for the life of the loan. The current rate for MIP is 0.85% of the loan, and this payment is typically rolled into your monthly mortgage payments. MIP protects the mortgage lender in case you are unable to pay the loan back. Think of it as extra insurance that you’ll pay your loan back, as the bank is taking a risk giving you the money.
Generally, a FHA loan will cost a home buyer more money over the term of the loan versus other home loans such as a conventional loan, VA loan or USDA loan due to the higher interest rate and MIP costs. The MIP is a big reason why home buyers with lower credit scores and smaller down payments still have the ability to purchase a house. Even with those disadvantages, it still allows police officers to buy a home when they otherwise may not have qualified to.
FHA Loans vs. Conventional Loans
While there are some disadvantages to a FHA Loan, there are still many advantages over conventional loans. Conventional mortgage loans are the most common type of home mortgage loan, accounting for over 60% of home mortgages.
- Police officers looking to get a FHA home loan must have a credit score of at least 580 to get a mortgage with a 3.5% down payment. However, to get a conventional home loan, you usually must have a credit score of 640 and above.
- Down payments for conventional loans range between 3% to 20%. Down payments on FHA loans, however, are between 3.5% and 10%. Bear in mind that the lower your credit score, the higher your down payment must be for FHA Loans, up to that 10%.
- FHA loans and conventional loans also differ in length of terms. FHA loans offer 15 or 30 years, while you can pay a conventional loan in 10, 15, 20, or 30 years.
- Down payment assistance programs are available for FHA loans, but not conventional loans.
- 100% of the down payment can be a gift when you apply for the FHA home loan, but only part of the down payment can be a gift with a conventional home loan. *Note: You will need to provide documentation of the gift to your lender.
How to Qualify for a FHA Home Loan
To qualify for a FHA home loan, you need to fulfill the following requirements:
Verify Your Income
To qualify for a FHA home loan, you must have verifiable income. Your lender can do this with your tax returns and pay stubs. They will need to verify that you have been working for at least the last two years, although it does not need to be for the same employer. If you have been a police officer in two different jurisdictions, that is ok. On the other hand, you might not qualify if you worked in another sector in the last two years. For example, if you were a teacher last year and in law enforcement this year, your chances might be smaller to be approved. That is because loan officers want to make sure that you are in a secure profession.
Be Able to Afford Payments
You must be able to pay your home loan and other debts you may have. The general rule is that your mortgage should not be more than 35% of your pre-tax total wages. Your total debt (including car loans and student loans) should also not be not more than 48% of your total earnings. If those numbers are lower than your current finances, you need to reduce the total you owe before getting approved.
Down Payment
Before you’re approved, you will need to have at least 3.5% of the purchase price as a down payment. If your credit score is less than 580, you will most likely need to pay closer to 10%. There are also many other costs at closing that you will need to prepare for financially. Your mortgage lender will be able to give you a list with costs before closing.
Credit History
Your lender will need to pull a credit history for you. If you do not pay your credit cards, student loans, or other debts regularly, you are unlikely to get a loan. Paying inconsistently makes your lender worried that you might not pay them back either. Make sure that all your bills are paid on time to ensure that your loan is approved.
The minimum credit score to get a FHA home loan is 580, but, your individual lender might require a higher score. If you have a low credit score, ensure that you check that your preferred lender accepts that score. If you do not know your credit score, you can use online resources to look it up. Every American is allowed to check their credit score from each of the three main credit reporters once a year for free without it damaging your credit. This is a great way to see any issues before you talk to a loan specialist. Fixing those errors will boost your credit over time.
Keep in Mind Home Value
FHA loans have strict guidelines on the amount you can borrow with the loan. The price range of the home will vary county by county, but FHA mortgage loan limits range from $356,362 to $822,375. This doesn’t mean you can’t purchase a home for more than this amount. You will just need to come up with the difference in home price somehow.
House Inspection
The house you are taking a loan out for also has to meet strict health and safety standards determined by the FHA. This is to ensure that the house will not become condemned and possibly force you to default on your loan. You will need to do an inspection on your potential house to show to your mortgage lender and the FHA that the house is not in danger of any hazards.
How Police Officers Can Get Additional FHA Loan Savings
Homes for Heroes mortgage specialists work with FHA home loans for police officers and provide significant savings on their lending fees to. In addition, you will receive Hero Rewards savings valued at 0.7% of the home purchase price after your closing when you use a Homes for Heroes real estate specialist to purchase your home. That’s how police officers like you can save an average of $2,400 on the purchase of your new home.
To get started, sign up today and Homes for Heroes will connect you with specialists in your area. Those specialists will be able to answer your questions, discuss whether the FHA home loan is right for you, and put you on the right path toward home ownership.
