Should You Consider an FHA Home Loan?
If you're looking at property for sale and getting discouraged by some of the loan requirements, don't give up hope. Some lenders cater to first-time homebuyers and have programs that allow for lower down payments and even reductions in closing costs. One such program is through the Federal Housing Administration (FHA), which issues nearly 22% of all new single-family mortgages in this country. Here is some information about FHA loans, their benefits, and what you need to do to qualify.
What is an FHA Loan?
An FHA mortgage is a loan obtained through a bank or credit union that is guaranteed by the Federal Housing Administration (FHA). These loans were created in response to an outbreak of foreclosures in the 1930s in an effort to stimulate the housing market. The federal government insures an FHA loan so that the lender's risk is reduced if the borrower defaults.
The Benefits of an FHA Loan
There are many benefits to the borrower with FHA loans. These are often the easiest loans to qualify for, and they have the best terms. You can get an FHA loan with imperfect credit and pay as little as 3.5% as a down payment on your home. A conventional mortgage, on the other hand, might require that you have excellent credit and ask that you put 20% down. You might also have lower closing costs with an FHA loan, and a new buyer can "assume" one of these loans.
Mortgage Insurance and FHA Loans
While there is a long list of benefits to FHA loans, there's also one downside. FHA loans require that you carry mortgage insurance in two forms. One is paid at the loan's inception but can be rolled into the mortgage, and the other is a monthly payment. This monthly mortgage insurance must be paid until your loan-to-value ratio is under 90% or for 11 years, whichever comes first.
How to Qualify for an FHA Loan
If you'd like to apply for an FHA loan, the loan requirements are set by the Federal Housing Authority and include:
- Steady employment with the same employer for the past two years.
- U.S. residency with a valid Social Security number.
- Ability to pay a minimum down payment of 3.5% on a home.
- Property for sale must be appraised by an FHA-approved appraiser.
- Minimum credit score of 580 (lower credit scores may qualify with 10% down payment).
- Two years away from bankruptcy and three years out of past foreclosures.
FHA lenders also closely view your ratio of debts to income. For example, a back-end ratio shouldn't be higher than 43% of gross income, and your monthly housing ratio (front-end ratio) shouldn't be higher than 31% of gross income. Your lender can help you with these calculations.
If you see a property for sale that interests you and need to get approved for a mortgage, see if you qualify for an FHA loan before looking at other options. These have many benefits that can save you significant cash over time. Ready to search for properties? Subscribe for new home alerts here.