Federal Housing Administration (FHA) loans were made to help home buyers who don't have the savings or credit score for a conventional loan. These loans are insured by the government in the case of default, which makes lenders more likely to take a chance on an otherwise undesirable applicant. They were originally made available in the 1930s to stimulate the market but have stuck around because the program boosts the economy and helps to preserve the American dream.
The Basics of the FHA Loan
While the government may be insuring FHA loans, they're not actually loaning the money. Instead, the government works with certain lenders by giving them official regulations alongside general guidelines. Apart from following the necessary rules though, it's the lender that makes the final decision when it comes to approval. That's why it's still important for home buyers to shop around when it comes to their lender. Not everyone will offer the same rates, terms, or benefits, whether the buyer is looking for a home in Green Hills or elsewhere.
FHA Loan Credit Requirements
Applicants for an FHA should have a credit score of at least 580 accompanied by a cash down payment of 3.5%. If the owner has at least 10% of the down payment, then they may be approved with a credit score as low as 500. All borrowers will need a steady work history or have worked for the same employer for at least two years. The owner must make the home their primary residence and have the property appraised by an FHA-approved vendor. The amount a homeowner is allowed to borrow will depend on the neighborhood they're looking in. The limits of an in-demand area will be higher than those in less expensive markets.
FHA Loan Income Requirements
The goal is to make the total cost of housing as small of a percentage as possible compared to the buyer's gross income. The ideal number is 30% or less, though this percentage can vary based on the lender. So if an applicant makes $6,000 a month before taxes, their mortgage, mortgage insurance, property taxes, homeowners insurance, and HOA fees should total $2,000 or less. When it comes to total debt, the ideal percentage is 43% of the total gross income. (Total debt would include car payments, student loans, credit card debt, etc.) So a person making $6,000 should have total debt of less than $2,600. Again, this number can fluctuate higher, depending on the circumstances and the lender in question.
Additional Factors When Applying for an FHA Loan
Borrowers will usually need to wait at least two years if they filed for bankruptcy and will need a spotless credit record during those two years to qualify. Those who were involved in foreclosure will need to wait at least three years. Finally, the home will need to meet the standards according to an approved appraiser. Homes that are in need of repairs or pose a safety threat are not acceptable candidates for an FHA loan. Buyers will also need to factor in the cost of mortgage insurance for up to the full life of the loan. This additional cost will vary based on lender and purchase price.
FHA loans can be excellent options for committed home buyers who just need a little extra help. However, the terms can be more difficult to meet than first meets the eye. If you're interested in an FHA, talking to the right real estate agent or lender is the best way to determine if it's a good option for you.