What is An FHA Loan?
An FHA loan is a mortgage option, approved by lenders and insured by the FHA (Federal Housing Administration). The borrowers get a smaller down payment and at any income level, they can still be eligible for this loan.
FHA does not provide home loans but they instead guarantee the lenders a repayment in case you default on the loan. The guarantee is what makes mortgage companies and banks work with a borrower who under normal circumstances, would not qualify for conventional home loans.
FHA Loans for First Time Homebuyers
A majority of Americans believe that FHA mortgage loans are for individuals with bad credit or those who have low income. However, this is not true. This is the most popular home loan products that is used in the United States.
Approximately 40% of home loans are FHA loans. The flexibility of their qualifying guidelines and their low down payment makes them very popular.
FHA Loans And Low-Income Buyers
Most borrowers will easily get approved for these mortgage loans since FHA loans have a more flexible debt to income ratio as compared to the traditional mortgages.
FHA Loan For A First Home Buyer With A Bad Credit
It is very reasonable for a first-time home buyer who has a bad credit to consider getting an FHA loan. With a credit score just 500 you can be eligible for this particular loan. Having a poor credit, however, will mean that you will have to pay bigger interests and higher monthly payments.
In this article, we shall look at a few basic things that you need to know about FHA home loans.
Prequalification for An FHA Home Loan
- Bankruptcy. Two years should have elapsed since you or/and your spouse bankruptcy charges were discharged. Nonetheless, lenders will require different waiting periods depending on the type of loan that you are borrowing.
- Short sale. You will qualify for an FHA loan after three years from your short sale. If you had no late payments for your mortgage for the previous twelve months, there will be no waiting period required.
- Foreclosure. You must have resolved your foreclosure for not less than three years since the resolution date, and you should not have had any late payments.
- A steady employment. You should have at least a two years employment history.
- You should be of legal age, be a legal U.S citizen and have a valid social security number.
With that being said there are other FHA loan requirements that you must meet:
- Minimum Down Payment Requirements
A minimum of 3.5% is required as a down payment when purchasing the property. You can make the down payment using your savings, a government grant or even a financial gift from your family or friend.
You must also have a credit score of 580 or higher. If your credit score ranges from 500 to 579, you will qualify for a loan to value ratio of a maximum of 90% and a 10% down payment will be required from you.
- Credit Score(FICO) Requirements
For an FHA loan, the down payment will entirely depend on your credit score. As mentioned above, to take full advantage of the 3.5% down payment, you will need a minimum credit score of 580. A 10% down payment will only be required from borrowers whose credit score ranges from between 500 and 579.
FHA home loan does not require an exceptional credit score of 800. With little blemishes of foreclosure or bankruptcy, you can still qualify. The minimum credit score for bad debt is 500.
- Debt Ratio Requirements
The minimum debt- to- income ratio according to FHA is 56.9% for borrowers with a credit score of 620 or higher. The United States Department of Housing and Urban Development or the HUD, however, prefers the FHA borrowers to have a debt to income ratio that does not exceed 43%. This simply means that the total monthly expenses including the mortgage payment should not use more than 43% of your monthly income. There is an exception for individuals who have a history of making similar payments successfully and/or those with significant cash reserves.
- Paperwork Requirements
During the mortgage documentation process, you are required to verify your assets, income and debts. This rule has become more important as a result of the current government lending standards. In 2014, the (ATR) Ability To Repay rule took effect and nowadays, lenders can obtain various financial documents to verify that a borrower has the ability to repay the debt. This rule applies to FHA mortgage loans as well, and the lender can ask for W-2 forms, bank statements or tax returns.
- FHA Closing Costs
Just like all other home loans, FHA comes with closing costs. The fee will include a title insurance, home appraisals and origination fees. Depending on your lender, FHA closing cost can range from between 2% and 5% of the purchase cost.
Before you decide to settle on your preferred mortgage, compare loan offers from different FHA lenders to ensure you get the lowest fee and the most competitive rates.
- Mortgage Insurance
Mortgage insurance is a must for borrowers who have put down less than 20% as a down payment. This insures lenders in case a borrower defaults on his/her mortgage. The two mortgage insurance premiums required by all FHA loans include;
- Upfront premium. 1.75% of the total loan is paid when the borrower gets the mortgage. The premium will be rolled into the borrower’s financial loan.
- Annual premium. It will be 0.45% to 1.05% depending on the LTV and loan term. The premium amount is usually divided into twelve and paid on a monthly basis.
When a borrower is given $150,000 for instance, the upfront will $2,625 and the annual premium will range from $675 to $1,575.
- The Lender That You Choose Should Be Approved By FHA
As mentioned above, FHA is not a creditor. Borrowers can only get their home loans from lenders who have been approved by FHA. Different lenders will have different fees, costs and rates even for a similar loan.
You can get an FHA loan from credit unions, banks or independent lenders. The services, documentation standers and costs will vary among the different mortgage brokers and lenders, therefore, you should take your time and compare the different available options so that you get the best deal.