To be eligible for a Kentucky FHA loan, Kentucky mortgage borrowers must meet the following lending guidelines:

Have a FICO score of 500 to 579 with 10 percent down, or a FICO score of 580 or higher with 3.5 percent down.

Have verifiable employment history for the last two years.
Have verifiable income through pay stubs, federal tax returns and bank statements.
Use the loan to finance a primary residence.
Ensure the property is appraised by an FHA-approved appraiser and meets HUD guidelines.
Have a front-end debt ratio (monthly mortgage payments) of no more than 31 to 45 percent of gross monthly income.
Have a back-end debt ratio (mortgage plus all monthly debt payments) of no more than 43 to 56.9 percent of gross monthly income (lenders could allow a ratio up to 56.9 percent, in some cases).
Wait one to two years before applying for the loan after bankruptcy, or three years after foreclosure (lenders might make exceptions on these waiting periods for borrowers with extenuating circumstances).
Kentucky FHA loans vs. Kentucky conventional mortgages
KY CONVENTIONAL LOAN KY FHA LOAN
Credit score minimum 620 500
Down payment 3% to 20% 3.5% for credit scores of 580+; 10% for credit scores of 500-579
Loan terms 10- to 30-year terms 15- or 30-year terms
Mortgage insurance premiums PMI (if less than 20% down) varies based on credit score and down payment Upfront premium: 1.75% of loan amount; annual premium: 0.45% to 1.05%

Kentucky FHA loans Advantages and Disadvantages

  • You can have a lower credit score: If you haven’t established much of a credit history or you’ve encountered some issues in the past with making on-time payments, a 620 credit score — the typical magic number for consideration of a conventional mortgage — might seem out of reach. If your credit score is 580, you’re in good standing with most FHA-approved lenders.
  • You can make a lower down payment: FHA loans also give the option for a smaller down payment. With a credit score of at least 580, you can make a down payment of as little as 3.5 percent. If your credit score is between 500 and 579, you may still be able to qualify for an FHA-backed loan, but you will need to make a 10 percent down payment.

Cons

  • You won’t be able to avoid mortgage insurance: Since your credit score is lower, you’re a bigger risk of default. To protect the lender, you have to pay mortgage insurance. You can roll the upfront insurance premium into your closing costs, but your annual premiums will be divided into 12 installments and show up on every mortgage bill. If you put down less than 10 percent, you have to pay those annual premiums for the entire life of the loan. There’s no escaping them. That’s a big difference from conventional loans: Once you build up 20 percent equity, you no longer have to pay for private mortgage insurance.
  • You’ll have to meet property requirements: If you’re applying for an FHA loan, the property has to meet some eligibility requirements. The most important is the price: FHA-backed mortgages are not allowed to exceed certain amounts, which vary based on location. You have to live in the property, too. FHA loans for new purchases are not designed for second homes or investment properties.

  • FHA borrowers must pay an upfront mortgage insurance premium of 1.75 percent of the loan, plus a fixed monthly mortgage insurance of 0.85 percent of the loan.

    For borrowers with a credit score of 700 or higher, the mortgage insurance premium on a conventional loan, which varies according to several factors, might be 0.68 percent, May says. In that case, a conventional loan would be the better option.

    But borrowers with a credit score between 620 and 680 could have a private mortgage insurance premium as high as 1.69 percent, which would make the FHA loan the better option.

    Disadvantages of FHA loans

    The main disadvantage of FHA loans is that the mortgage insurance premiums must be paid for the life of the loan for borrowers who make a down payment of 3.5 percent. FHA borrowers can only eliminate their mortgage insurance payment by refinancing into another type of loan.

    “Conventional loans require less mortgage insurance,” Shalaby says. “In addition, borrowers have the option of lender-paid mortgage insurance, which wraps the insurance into the loan with a slightly higher rate.”

    Unlike FHA loans, private mortgage insurance automatically ends on conventional loans when the borrowers reach 20 percent in home equity by paying down their loan. Borrowers can also request an appraisal and earlier end to their private mortgage insurance if their home value has increased.

    One more disadvantage of an FHA loan is that FHA appraisals are stricter than those required for conventional loans, May says. Buyers purchasing a fixer-upper may have a harder time qualifying for an FHA loan unless they opt for a renovation loan.

    Every mortgage loan choice should be made on an individualized basis that takes into consideration the borrowers’ entire financial plan. First-time buyers can ask their lender for a loan comparison of an FHA loan and a conventional to see which fits their needs best.

    —

    Joel Lobb
    Mortgage Loan Officer
    Individual NMLS ID #57916
     
    American Mortgage Solutions, Inc.
     

    Text/call:      502-905-3708

    fax:            502-327-9119
    email:              kentuckyloan@gmail.com