The Federal Housing Administration has been the catalyst for many affordable homing options, and one of the primary ways that they have done so is by offering special loans with low interest rates that protect both the buyer and the seller by reducing the buyer’s chance of going into default. Let’s take a closer look at these loans and how you can figure out whether or not you are eligible for one.
What Is an FHA Loan?
A Federal Housing Administration, or FHA, loan is a mortgage loan that is actually insured by the Federal Housing Administration. In short, the government insures these loans for specific lenders so that they can reduce their risk. They’re lower interest loans for the borrower, and if the borrower defaults, the FHA will help pick up some of the tab.
The FHA loan program was actually developed in the 1930’s as a response to a huge influx of foreclosures and defaults that started to occur. It also helped to stimulate the then-suffering housing market as well. Many first-time home buyers opt to go with an FHA-insured loan for their first mortgage.
What are the benefits of an FHA Loan?
There are a number of benefits and advantages to FHA Loans, which is why so many first-time home owners decide to go with them instead of other types of loans. Here are some of the biggest advantages.
• Down payments are incredibly low. The down payment is only around 3.5 percent of the total cost of the home, as long as your credit score is 580 or better. If your credit is between 500 and 579, that down payment goes up to 10%. Many lenders require up to 20% for a down payment, so this is definitely a huge advantage, even if you have very poor credit.
• FHA loans are incredibly simple to qualify for. You can have less than perfect credit and still qualify for an FHA loan. You can even have bankruptcy on your record and still be eligible, as long as it has been 2 years since you filed and are in good standing. This is because these loans are insured by the FHA, so the risk is inherently lower for lenders.
• The closing costs for FHA loans are low, which is always a good thing. They will vary by lender, but most of the time will be 50% to 75% less than the closing costs offered by other lenders.
• Many times, if you sell your home and still owe on your mortgage, you have to pay off the loan yourself. FHA loans are different; if you decide to sell your home and you still owe on your loan, the buyer can take over the loan you have. This is known as “assuming” the loan.
So as you can see, obtaining and paying an FHA loan is incredibly simple, and it’s actually a really good option if this is your first home and you have little to no credit established yet.
What Are the Requirements of Obtaining an FHA Loan?
As with anything in the government, there are a bunch of requirements that you have to fit into in order to qualify for an FHA loan. And like everything else with the government, these lists are insanely extensive and you have to read over them for an hour to understand exactly what the government wants from you. That’s how I want to spend my Saturday night, don’t you know? Anyway, here is a list of most of the requirements surrounding FHA loans.
• Your employment history has to be consistent or you have to have been with the same employer for at least 2 years.
• You must be a legal resident of the United States that is of a legal age to sign a mortgage
• You must have a valid social security number.
• The home you are purchasing must be your primary residence. You cannot buy a residential property using an FHA loan.
• Your property must be appraised by an appraiser approved by the FHA. When the appraiser comes, he will determine if the property meets the FHA-established standards. If the seller does not comply with the appraiser’s demands and you still want to purchase the home, you will have to pay for the repairs yourself at closing.
• Your front-end ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, home insurance) needs to be less than 31 percent of your gross income. In some cases, the ratio can be higher (up to 47%) as long as the lender sees your circumstances as acceptable to take the risk on.
• Your back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) needs to be less than 43 percent of your gross income. As with the front-end ratio, this ratio can be higher (up to 57%) as long as the lender sees your circumstances as acceptable to take the risk on.
• You must be two years out of bankruptcy and/or three years out of foreclosure and have good credit standing at the point that you apply for the loan. There are exceptions to this rule.
As you can see, most of these are very reasonable requirements. The government wants to make sure you can get a house, but they don’t want to lose money in the process of doing so. That’s how everything works, isn’t it? If you need more information about FHA loans, check out the U.S. Department of Housing and Urban Development (HUD).
If you are looking for a loan that will help you purchase a home, or if you are looking to refinance your already existing loan, contact us at 1-800-505-8121 or visit us online at www.EvoqueLending.com.