FHA Loans – All you need to Know

What is an FHA Loan?

Managed by Department of Housing and Urban Development (HUD), mortgages that are insured by the Federal Housing Administration are FHA Loans. More popular especially among first time home buyers it is beneficial for all types of buyers. First time buyers love it because they allow low down payment and is not very strict on credit scores. Borrowers, however, have to pay for mortgage insurance premium which insures the lender against the possible losses that may be a result of buyer default.

FHA loans can be qualified for at a down payment as petty as 3.5%, when the borrower has a credit score of 580 or better. With a 10% down payment even a borrower with credit score between 500-579 can qualify for this loan. The interest rate goes up however, as the credit score gets lower.

As a reaction to sudden increase of foreclosures and defaults that happened in 1930’s, the FHA program was initiated to

  • Provide adequate insurance to mortgage lenders.
  • Make loans reachable for people who don’t have an awesome credit score.
  • Make loans reasonable for ones who cannot afford to pay heavy down payments

Basically, for FHA-approved lenders, the federal government provides insurance to minimise the risk of loss in case of borrower defaults.

Benefits of FHA Loans

  • Easiest types of mortgage loans to qualify for.
  • Low down payment required – as low as 3.5 percent for maximum financing.
  • Acceptance for Low credit scores – even as little as 500 can qualify for an FHA loan.
  • People with low or bad credit, been foreclosed upon or undergone bankruptcy may still qualify for an FHA Loan.
  • Assumable mortgage – means if you wish to sell your, the buyer can “assume” your loan.

FHA Loan Limits

Varying by state and county, maximum mortgage limits are set for FHA loans by the Federal Housing Authority. One may be able to get up to $729,750 with a 3.5% down payment in certain counties. As a comparison, Conventional loan financing that can be bought by Fannie or Freddie is right now at a $625,000 limit.

FHA Loan Requirements

Other than credit score and down payment, there are other requirements as well for this type of a loan. Below are the complete FHA loan requirements, set by the Federal Housing Authority:

  • Steady employment history – should have worked for the same employer for the past two years.
  • Valid Social Security number, Legal U.S. residency status and legal age to sign a mortgage.
  • 3.5% Minimum down payment. This can be gifted by a family member.
  • New FHA loans only for primary residence occupancy.
  • Property appraisal from a FHA-approved appraiser.
  • Front-end ratio needs to be less than 31 percent of gross income.(front end ratio is – mortgage payment plus HOA fees, mortgage insurance, property taxes, homeowners insurance)
  • Back-end ratio has to be less than 43% of gross income. (Back-end ratio is mortgage plus all your monthly debt, like credit card payment, car payment etc.)
  • Minimum credit score of 580 for maximum financing of 96.5%.
  • Minimum credit score of 500-579 for maximum financing of 90%.
  • Borrower must be out of bankruptcy at least 2 years and a re-established good credit. (Exception – out of bankruptcy one year or more and if circumstances were beyond control that caused the bankruptcy)
  • Borrower should be out of foreclosure at least 3 years and a re-established good credit. (Exception – extenuating circumstances and improved credit.)
  • The property must meet certain minimum standards at appraisal.

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