Are you looking forward to buying an affordable home?
If yes, then you have landed on the right page. Finding a home that is affordable to purchase sounds like a distant dream to many. But in reality, this is possible if you use the FHA loan program.
Are you wondering what the Federal Housing Administration(FHA) Loan program is?
Well, do not worry we will take you on a detailed tour which will explain everything you must know about FHA. so without wasting much time, let’s get started.
What is Federal Housing Administration(FHA) Loan- Introduction
FHA loan is a home mortgage loan. This loan is insured by the federal government and a bank or any other lender issues it. The lender cannot be just anyone, the agency approves the authentic lender.
The amount of minimum down payment for this loan is lower than other loans and applicants with a low credit score can easily apply for it. In fact, it does not require a higher credit score as it is required in other loans.
Families that survive on a low to moderate income can attain ownership of a home by using this loan. This type of loan is very much helpful for the ones buying a home for the first time ever. However, the ones that are planning to buy a house again can also avail of benefits from this loan.
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What are the Eligibility Criteria for an FHA Loan?
There are some lending guidelines and to get an FHA loan, the borrower must fulfill these. The requirements are given below.
- Employment history that must be verifiable for the last 2 years.
- A FICO score of 500-579 with a 10% down payment or if the FICO score is more than or equal to 580 then the down payment reduces to 3.5%.
- Income sources which must be verifiable through bank statements, federal tax returns, and pay stubs.
- Legal residential proof.
- The front-end ratio of the gross monthly income should be less than 31%. The front-end ratio is property taxes, HOA fees, homeowners insurance, and mortgage insurance.
- The back-end ratio of the gross monthly income should be less than 43%. The back-end ratio is mortgage payments and other monthly consumer debts.
- The property must be evaluated by an appraiser approved by FHA and it must meet HUD(Department of Housing and Urban Development) guidelines.
- If the borrower is bankrupt, they must wait for 1-2 years before applying for this loan. The period is 3 years in case of foreclosure. However, in extenuating circumstances, the lenders can alter the waiting period making it an exceptional case.
How Does an FHA Loan Work?
The HUD offers a search tool online which helps you find a lender in your area who is FHA approved. Based on the basic information provided by you, the lenders will decide if they wish to approve your application for an FHA loan.
Once you have some lenders on your list, look for the ones that can pre-approve your loan application. For this, you must present all your documents that are required for the process and complete the application process they follow. These may include bank statements, income proof, etc.
The interest rates in FHA loans are fixed and there are 2 terms- 15 years and 30 years. These flexible measurements are kept in mind, especially for financially weaker segments who find affording a private mortgage a distant dream. With FHA loans, people who fall in this segment can own a house.
However, there is one condition here. To protect banks or other lenders from the case where a borrower defaults, borrowers are liable to pay an FHA mortgage insurance. It is mandatory on almost all the loans where the borrower’s down payment is less than 20%.
The borrower must pay two premiums for mortgage insurance in all FHA loans. These are as follows
- Upfront mortgage insurance premium: Right when the borrower gets the amount of the loan, 1.75% of the loan amount is to be paid. The premium paid can be combined into the financed loan money.
- Annual mortgage insurance premium: Depending on the term of the loan, the loan amount and the initial loan-to-value(LTV) ratio is decided. It is 0.45%(15 years) and 1.05%(30 years). This premium amount is paid every month. The amount is divided by 12 to know the exact value.
Let us try to understand this with an example. For instance, if you are borrowing $100,000, then $1750 will be the upfront premium and the annual premium will be $450($37.5 per month) for 15 years term. While it will be $1050($87.5 per month) for 30 years term.
For the buyers who can manage to pay a 10% down payment of the property’s value and keep up in paying the monthly mortgage amount, their mortgage insurance premium gets canceled after 11 years. In the case of the borrowers with an initial LTV ratio of more than 90%, they will have to pay the full mortgage insurance premium.
Things to Remember Before Applying for FHA Loans
- Before submitting the loan application have a rough estimate of your budget and how much you can easily afford.
- Get all the required documents together so that it is easier for you to go with the approval process.
- After getting approved by a number of lenders in your area, compare their deals and try to get the best offer.
What are the different types of FHA Loans?
- Home Equity Conversion Mortgage(HECM)
- Traditional Mortage
- FHA 203(K) Improvement Loan
- Section 245(a) Loan
- FHA Energy Efficient Mortgage
Pros and Cons of FHA Loans
Pros of FHA
- Low down payment.
- Easy approval with a low credit score.
- One can use gift funds for the down payment.
Cons of FHA
- Mortgage insurance is needed.
- The maximum loan amount is fixed and restrictive.
- Less attractive offers when compared to conventional loans.
Concluding Thoughts
If you are the one with not much money for the down payment or do not have a fantastic credit score then this FHA loan is the best option for you. However, there are some conditions attached to it like mortgage cost which is long-term and is mandatory.
This piece of write-up has all the necessary information required by an applicant for a Federal Housing Administration loan. Hope this will help you take a step ahead in your decision-making.