An FHA Loan Explained
An FHA is a mortgage that is offered by the Federal Housing Administration (FHA). This particular mortgage is popular among those buying homes for the first time because they, first of all, allow for a lower credit score, and they also are more lenient with the down payment (only 3.5% down). Borrowers will also have to pay a mortgage insurance premium to protect the lender if the borrower defaults.
If borrowers can produce a credit score of more than 580, they will be able to acquire the FHA loan with the 3.5% down payment. The borrower can still qualify for an FHA loan if their credit score is between 500-579, but they will have to put down a 10% down payment instead. Moreover, the lower your credit score is, the more interest the borrower will have to pay.
There was a tremendous amount of foreclosures and defaults in the 1930s, and part of the problem was due to mortgage lenders not having any insurance to guard against borrowers who failed to pay their premiums. Thus, the FHA program was not only created to help these lenders get back on their feet, but it also provided a much-needed shot in the arm for the housing market because it brought people with less-than-perfect credit into the housing market. However, under the FHA program, the government will ensure these lenders so they now have the freedom to lend out mortgages to more people. They have the assurance that their risk of loss will be covered if a borrower defaults on the loan.
Loan Requirements for FHA Borrowers
Are you interested in buying a home with an FHA loan? If you wish to try to qualify for the St. Louis FHA loan that will only require a 3.5% down payment, then you will have to ensure that your credit score is 580 or above. However, as we have covered before, you can still qualify for an FHA loan with a lower credit score as long as you put up a 10% down payment. Just make sure that your FICO is always at least 500 or above.
However, the credit score and the down payment requirements are just two of the hoops you will need to jump through to qualify for an FHA loan. Here is the complete list of things to consider:
FHA borrowers will need to have a steady history of employment. If there are gaps, it is still possible to qualify for an FHA loan as soon as they have been with the same employer for at least the past two years.
Borrowers need to have a valid Social Security number, be a legal resident, and be of the legal age for signing a mortgage in their state.
The minimum down payment for an FHA mortgage will always have to be 3.5 percent, and yes, the money can be a gift from a family member.
You can only utilize an FHA loan if you are going to use the home as a primary residence.
Borrowers must have the proposed property appraised from an FHA-approved appraisal specialist.
A borrower must have an appropriate front-end ratio. This means that such things as homeowners insurance, property taxes, mortgage insurance, HOA fees, and the mortgage must all no more than 31 percent of their gross income. The good news is that some borrowers can still get approved if they have reached as high as 40 percent. Of course, this might mean extra work for the lender simply because they will have to prove this note is an acceptable risk. Compensating factors must be accounted for when it comes to approval of the loan.
To receive maximum financing, all borrowers must have a minimum credit score of 580. This qualifies them for the 3.5% rate.
As long as borrowers have a credit score between 500-579, they will be able to qualify for an FHA loan with an LTV of 90 percent. They must put down a down payment of 10% at the very least. Your credit-worthiness will be determined by FHA-qualified people on a case-by-case basis.
The good news is that you can still qualify for an FHA loan if you have had a bankruptcy in your past. You must be two years from the bankruptcy and you must have taken steps to reestablish your credit. However, some people who have a bankruptcy that is only one year old can still qualify if they prove they manage their money well and that the bankruptcy was caused by extenuating circumstances.
There is more good news for FHA borrowers who have had a foreclosure in their past. As long as you are at least three years out of foreclosure and established a solid credit history again, you can be considered for an FHA loan. Again, if you want to qualify for an FHA loan and it hasn’t been three years since your foreclosure, you can still possibly qualify if you can prove extenuating circumstances. Please note that if you could not sell your home and had to make an unexpected relocation, this is not considered an extenuating circumstance.
There are also some property requirements that must be met. If your home is appraised and does meet the FHA property standards, then it must either be repaired by the seller, or you must pay for the repairs yourself by the closing date.
Benefits of FHA Loans: A Lower Down Payment and Less Stringent Credit Requirements
The beauty of an FHA loan is that it is very easy to qualify for. You can have less-than-perfect credit or not even have enough for a regular down payment, and you can still qualify for one of these loans.
Can’t afford a 20 percent down payment? You should look into an FHA loan. Has your credit had some hiccups? Apply for an FHA loan. Don’t think you can qualify for private mortgage insurance? An FHA loan might be for you.
If there was the full scope of the advantages of FHA mortgages, it would be a good deal. However, FHA loans can often make selling your home easier. This is due in part to the fact that an FHA mortgage is “assumable.” When you go to sell your home, you can simply have the new owner “assume” your FHA mortgage.
These factors make an FHA home mortgage something worth looking into.