As someone looking to buy a home, you probably might have come across the term “FHA Loan.” But what is an FHA loan exactly? Well in this article, we will be exploring some of the details on FHA loans and everything you need to know about how it works.
What is an FHA Loan?
An FHA loan, or a Federal Housing Administration loan, happens to be a mortgage loan that is insured by the FHA, a government agency that is located in the U.S. Department of Housing and Urban Development (HUD). The goal here is to make homeownership a lot more accessible, particularly for people purchasing a home for the first time, or individuals with much lower credit scores.
You would be able to pay two types of mortgage insurance to protect your FHA-approved lender against losses if you stop making mortgage payments.
You do not have to be a first-time homebuyer to be able to get your hands on an FHA loan, though you would be required to live in the home that you purchase as your primary residence for at least a year. still like a lot of first-time homebuyer programs, there are no limits to the income, which offers much higher-income earners an additional home loan option if they do not meet the minimum 620 credit score that is required for a conventional loan.
FHA Loan Requirements
FHA loans basically work similarly to other home loan programs. You would be required to qualify based on your income, credit history, and employment history, and even verify if you have the funds for the down payments and closing costs. However, the minimum mortgage requirements are significantly different from other loan programs.
- Credit score: 500 (10% down payment), 580 (3.5% down payment)
- Down payment: 3.5% (580 score), 10% (500 score)
- Debt-to-income ratio: 43%
- Mortgage insurance: Yes
- Loan limits: Yes
- Income limits: No
How to Qualify
In other to qualify for the loan, you are expected to meet the following eligibility criteria. They include:
- First, you are required to have a steady income and employment history. This basically means demonstrating that you have a reliable source of income and have been quite consistent for the past two years.
- You are expected to be able to make the minimum down payment required by the FHA.
- Must have a valid social security number and is expected to be a lawful resident of the United States.
Once you meet all these criteria, you will be eligible to apply for an FHA Loan.
FHA Loan Credit Score Requirements
One significant advantage of FHA loans is that they are expected to have more lenient credit score requirements compared to conventional loans. While conventional loans usually require a credit score of 620 or higher, they can be accessible to individuals with credit scores that are as low as 500.
However, have it at the back of your mind that the lower your credit score, the higher the interest rate you may receive. In other to secure a more favorable interest rate, it is best that you improve your credit score as much as you can before applying.
FHA Loan Limits
It also carries some specific limits on the amount of money that can be borrowed. These limits usually vary depending on the location of the property and are adjusted annually. It is very important that you take note of these limits, as they can impact your ability to purchase a particular property.
The FHA offers the resources and the tools that is required to help determine the loan limits in your area, ensuring that you stay within the eligible range when you are searching for your dream home.
FHA Loan Application Process
When applying for the FHA loan, there are steps you need to take. First, you would be required to gather the necessary documentation, which includes proof of income, employment history, and identification. Also, you would be required to find an FHA-approved lender and complete the loan application.
The lender would have your application reviewed and documentation, assessing your eligibility. If approved, you would get a loan estimate, which outlines the terms and conditions of the loan. Finally, you would go through the loan closing process, where the required paperwork is signed, and the funds get disbursed. Understanding the process of the application can help you when it comes to navigating.
FHA Loan Closing Costs and Fees
Like any home loan credit, it accompanies shutting expenses and charges. Appraisal fees, inspection fees, title fees, and other administrative costs are typical of these expenses. When creating a budget for the purchase of a home, it is essential to account for these costs. Notwithstanding, one benefit is that they permit the dealer to contribute towards the purchaser’s end costs. This may assist in lessening some of the financial burden of closing it.