The FHA loan has been a great help to those who do not have enough resources to qualify for a conventional loan. Aside from first-time home buyers, it is also popular among those that undergone financial hardship like short sale and foreclosure.
The Federal Housing Administration (FHA) is ultimately “backed” or insured by the federal government. Here are the requirements you must comply with to qualify.
FHA loans are offered on less expensive properties. Because of this, there are loan limits set, depending on the area. That means the property you can get a loan for should not go over the loan limit set in your state. This information can be found on the HUD website.
In addition to the actual cost of the property, your mortgage payments include an interest. FHA loan interest rates are at an average of 3.25%. You can choose between a fixed rate mortgage and an adjustable rate mortgage, depending on which fits your goals.
FHA Fixed Rate Mortgage – In the fixed rate mortgage loan, the interest rate is constant throughout the duration of the loan. It means that the interest rate when you closed the deal will be the same interest rate until the loan is paid off in fifteen to thirty years. This protects you from unexpected changes in monthly payments.
FHA Adjustable Rate Mortgage – The adjustable rate mortgage involves greater risk as your monthly payments may significantly increase over time. In the same way, it may also decrease. This change usually starts happening on the 5th year of the loan, but may also start as early as the 3rd year or as late as the 7th year and beyond.
The good thing about the adjustable rate in FHA loans is its nature of protecting the home owners from payment changes, unlike conventional mortgage loans.
FHA Credit Requirements
The credit score is interpreted as a person’s capacity to manage his debt. Experian, TransUnion, and Equifax are among the three credit bureaus that report your credit scores.
If you have a not-so-pleasing credit score, FHA loans could be your best option. The FHA is lenient with credit scores. While conventional mortgage loans require a credit score of at least 700, the acceptable score for FHA loans is 580. This makes it possible for those with bad credit to still get qualified for a mortgage loan.
Investing upfront money for a mortgage in the form of a down payment is a way of establishing relationship. When a person puts down a certain amount of money, he commits a chunk of his pocket to the agreement – something lenders definitely want.
The normal range of down payment for a conventional loan is between 10 to 20 percent. This may be too much for some. With FHA loans, down payments can be as low as 3.5%, making it more affordable.
Aside from personal savings, one can get his funds for down payment from tax returns. They can also come from friends and family as a gift or from down payment assistance programs.
Debt to Income Ratios
The Debt to Income Ratio (DTI) determines how much of the gross monthly income goes toward paying recurring loans such as car loans, student loans, and credit cards minimum monthly payments. It can also include mortgage payments, alimony, child support, and personal loans.
For FHA home loans, the DTI should be less than 50% to get approved. So for example, if your monthly income is $4000, in order to qualify for an FHA loan, less than $2000 should go towards monthly recurring payments.
As soon as you decide to buy your home, do not be surprised of the fees your lender will require you to pay to have your paperwork processed. These fees include appraisal fees, attorney’s fees, title insurance, home inspection fees, land survey, lenders origination fees, credit reports – and the list goes on.
With FHA mortgage loans, up to 6% of the value of the property can be paid by the seller. This benefit is only available in a few loan programs.
Not all purchases are eligible for an FHA loan. First of all, the property should be where you intend to reside in as your primary home. The home should also pass the safety inspection, also called an FHA appraisal. It should be functional — no broken windows, safe staircases, and working kitchen among others. When you are applying for another type of FHA loan, however, called the FHA rehab loan, the mentioned safety restrictions may not apply.
Having said all the requirements when applying for an FHA loan, you should already have a better understanding whether you qualify or not. You should also have an idea on the type of properties to shop for when thinking about getting an FHA loan.