The Federal Housing Administration was created to boost the country’s housing market. The FHA home loan program consists of different mortgage products but is exclusive to owner-occupied homes. Rental properties or anything of that nature are not allowed.
Although the mortgages are still originated by private lending organizations, the government guarantees all loans under the FHA program, encouraging lenders to offer easier-to-qualify home loans. The insurance is in place to safeguard the investment of the lender in case a debtor default. To date, the FHA has backed up more than 40 million mortgages.
FHA Loans – Basic Information and Advantages
This loan program is experiencing a steady rise in popularity thanks to its very affordable down payment and lenient underwriting for borrowers with imperfect credit. The FHA loan attracts many first-time homebuyers and people with credit issues or limited savings.
The biggest selling point of an FHA-backed mortgage is its humble down payment requirement of 3.5% for borrowers with FICO scores of 580 and above. Most mortgages demand a 10% to 20% down payment, which can be too steep for the average family.
Another feature that makes FHA loans stand out from the conventional competition is their flexible payment methods for the closing cost. If the borrower can’t come up with the funds needed for the closing costs of the loan, friends, and family can step in and fund the costs to purchase a house. The seller can also shoulder a part of the expenses.
FHA Loans – Requirements and Eligibility
If you’re interested in applying for an FHA mortgage, you need to comply with the required paperwork and check your eligibility with an FHA-approved lender.
You’re likely to qualify for FHA mortgage if
- You have a credit score of 580 or more.
- You’re employed for at least two years and with a steady flow of income.
- Your total debt-to-income ratio is below 45% of your gross income.
- The property you wish to acquire meets FHA standards.
Should you pass the assessment, you need to submit the following application requirements to your lender:
- Any proof of identification issued by the government (passport, driver’s license, military ID, etc.)
- Most recent pay stub
- Proof of income and salary – W2’s and tax return for the past 2 years
- Bank statement for the past 2 months
- Current 1-year profit and loss statement and most recent tax returns (for businesses only)
Is FHA loan the best option?
The FHA loan can help you pay for a new home – whether it’s a new construction house, a charming fixer-upper, or a modern condominium unit. To make up for the relaxed standards and low down payment, however, you’ll have to pay for mortgage insurance every month until the loan is paid off completely.
That said, take the time to learn more about it, think things through, and look at all your options before signing up for this government-backed loan.
Once you’re convinced that it’s your best route to homeownership, seek the help of a reliable real estate agent or contact an experienced FHA lender in your area.