FHA Loan Overview
FHA loans are mortgages that the Federal Housing Administration insures. These loans are very popular with first-time homebuyers because they allow down payments up to 3.5% for those with credit scores above 580+. However, mortgage insurance premiums must be paid by borrowers to protect the lender in case of default.
For borrowers with credit scores of 580 and higher, an FHA loan is possible with as low as 3.5% down payments. If a 10% downpayment is made, the borrower's credit score could be anywhere from 500 to 579. However, keep in mind that the interest rates borrowers will get depend on how a credit score is calculated.
FHA was established in response to the 1930s rash of defaults and foreclosures. It provides adequate insurance for mortgage lenders and helps to stimulate the housing market. Loans are affordable and accessible to people with low credit scores or low down payments. The federal government insures FHA-approved lenders to protect their loans against defaults in mortgage payments.
FHA Loan Requirements
To be eligible for an FHA loan, borrowers must have a minimum FICO score of 580. A credit score of less than 580 does not automatically make you ineligible for FHA loans. A minimum 10% down payment is required.
FHA loans require that you have a good credit rating and that you pay a down payment amount. The Federal Housing Authority has compiled a comprehensive list of FHA loan requirements:
The borrower must have a stable employment history, or they will not be able to get credit if they aren't employed by the same employer in the last two years.
Borrowers must possess a valid Social Security Number, legal residency in the U.S., and be legally able to sign a mortgage in their state.
The minimum down payment for borrowers must be 3.5 percent. A family member can gift the money.
Only primary residence occupancy is eligible for FHA loans.
A property appraisal must be obtained from an FHA-approved appraiser by the borrower.
The typical front-end ratio of borrowers (mortgage payment plus property taxes, HOA fees, mortgage insurance, homeowners' insurance) should be lower than 31 percent. A higher percentage may be possible to get approval. The lender will need to justify why they think the mortgage is acceptable. Any compensating factors that were used to approve the loan must be included by the lender.
Borrowers' back-end ratio (mortgage plus any monthly debts, i.e., credit card payments, car payments, student loans, etc.). Usually, it should be less than 43% of their gross monthly income. A higher percentage may be acceptable. The lender will need to justify why they think the mortgage is acceptable. Any compensating factors that were used to approve the loan must be included by the lender.
Maximum financing requires a minimum credit score of 580 and a minimum downpayment of 3.5%.
For a maximum LTV of 90%, borrowers must have a credit score of at least 500-579 and a minimum down payment of not less than 10%. FHA-qualified lenders will assess each applicant's creditworthiness on a case-by-case basis.
Borrowers must have good credit and be at least two years since bankruptcy. If you have been out of bankruptcy for longer than one year and you managed your money responsibly, exceptions may be made.
Borrowers must have good credit and be at least three years since their last foreclosure. If there are extenuating circumstances or you have improved your credit, exceptions may be made. This exception does not apply to situations where you are unable to sell your house due to having to move to another area.
At appraisal, the property must meet minimum standards. If the property you're looking to purchase does not meet these requirements and the seller won't agree to repairs, the only way to get the necessary repairs done is to pay at closing. (To be kept in escrow until repairs are completed).
FHA Loans Have Many Benefits: Low Down Payments And Less Stringent Credit Score Requirements
FHA loans are one of the most straightforward types of mortgage loans. They require a low downpayment and can be approved by people with less than perfect credit. Maximum financing is possible with FHA loans if you pay a down payment of 3.5%. FHA loans are available to borrowers with less than 500 credit scores.
An FHA loan may be the best option for borrowers who can't afford a 20% down payment, have lower credit scores, or cannot get approved for private Mortgage Insurance.
An FHA loan also has an assumable loan that allows you to "assume" if you sell your house, the loan you have. FHA loans may still be available to people with low credit or poor credit who have had bankruptcy proceedings or been foreclosed on.
FHA Loans Require Mortgage Insurance
There was a catch. FHA loans are subject to certain conditions. The house must also be appraised by an FHA-approved appraiser.
The monthly up-front premium for mortgage insurance (UFMIP):
This is an upfront premium payment that borrowers pay each month. It does not matter what credit score they have. Example: $300,000.00 loan x 1.75% = $5.250. This amount can be paid at closing as part or all of the settlement fees. It can also be rolled into the mortgage.
Monthly MIP (charged monthly):
This is an annual premium that will be added to your mortgage payment.
How Do You Get An FHA Loan?
To help you obtain an FHA loan, a lender must be approved and registered by the Federal Housing Authority.
