Similar to all lenders, the FHA has certain requirements that must be met to be considered eligible for a mortgage insured by them. Unlike many conventional loans, however, FHA loans have less stringent requirements for borrowers to meet in order to qualify.
There are a number of requirements that must be met before being approved for an FHA loan:
Whereas many lenders ask for a 20-percent down payment, you don’t need a huge upfront payment for a government backed mortgage. The FHA needs a down payment 3.5% of the purchase price.
Even your credit score isn’t a huge focus for the FHA; you need a score of 580 or higher, but if your credit history shows that you make your payments on time, it’s likely that your loan application will be approved.
Despite its lenient eligibility guidelines, the FHA is ultimately an insurer of loans, so the agency will try to confirm that the borrower does not get into a mortgage that he/she cannot afford. Therefore the debt-to-income ratio is considered before you are granted a loan. The highest ratio allowed by the FHA is 43 percent.
The FHA operates solely from its own generated revenue, not any federal taxes. To be able to insure lenders, the agency mandates that borrowers pay FHA funding fees, in the form of mortgage insurance premiums.
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FHA loans aren’t perfect for everybody, but they are an excellent fit in some situations. The main appeal is that they make it easy to buy property. But remember that these benefits always come with trade-offs.
The most attractive features include:
1. Small down payment: FHA loans allow you to buy a home with a down payment as low as 3.5 percent. Other (conventional) loan programs may require a larger down payment, or they require high credit scores and high incomes to get approved with a small down payment. If you have more than 3.5 percent available, you might be better off making a more substantial down payment. Doing so gives you more borrowing options, and you’ll save money on interest costs over the life of your loan.
2. Other peoples’ money: It’s easier to use gifts for your down payment and closing costs with FHA financing. Also, sellers can pay up to 6 percent of the loan amount toward a buyer’s closing costs. You’re most likely to benefit from that in a buyer’s market, but even in strong markets, you can potentially adjust your offer price enough to entice sellers.
3. Prepayment penalty: There is none (a big plus for subprime borrowers).
4. Assumable loans: A buyer can “take over” your FHA loan if it’s assumable. They pick up where you left off, benefiting from lower interest costs (because you’ve already gone through the highest-interest years, which you can see with an amortization table). Depending on whether or not rates change by the time you sell, the buyer might also enjoy a low interest rate that’s unavailable in the current environment.
5. A chance to reset: With a recent bankruptcy or foreclosure in your history, FHA loans make it easier to get approved. Two or three years after financial hardship is typically enough to qualify for financing.
6. Home improvement and repairs: Certain FHA loans can be used to pay for home improvement (through FHA 203k programs). If you’re buying property that needs upgrades, those programs make it easier to fund your purchase and improvements with just one loan.
How do FHA Works?
We issue FHA loans and the FHA provides us with a guarantee to reduce the risk. To get a loan, contact us and we will discuss your options, including FHA loans and alternatives, and decide on the right program for your needs.
Mortgage insurance: The FHA promises to repay lenders if a borrower defaults on an FHA loan. To fund that obligation, the FHA charges borrowers (that’s you) a fee.
Borrowers also pay a modest ongoing fee with each monthly payment, which depends on the risk the FHA takes with your loan. Shorter-term loans, smaller balances, and larger down payments result in lower monthly insurance costs. Those charges range from 0.45 percent to 1.05 percent annually. Most borrowers with a small down payment and 30-year loan pay 0.85 percent (or 85 basis points).
FHA loans are available for multiple types of properties. In addition to standard single-family homes, you can buy duplexes, manufactured homes, and other types of properties.