An FHA loan is insured by the Federal housing administration for the purposes of a mortgage. These loans originated after the Great Depression, when defaults and foreclosures were commonplace in the housing market. Today, the U.S. government insures the loans for lenders approved by the FHA for the purposes of reducing risk if a borrower were to default on the payments in their mortgage.
FHA loans are popular because they are generally the easiest to qualify for. This is due to the fact that a small down payment is required (3.5%) and that buyers with lower credit scores and still be eligible. Before determining whether an FHA loan is an ideal situation for you, you should carefully consider whether you’ll be able to afford a regular down payment.
FHA loans are also popular because buyers with a past history of bankruptcy or foreclosure may still be eligible for the loan.
Downsides of FHA Loans
Since FHA loans are available to a broader range of people, there are specific stipulations associated with them. For example, an FHA mortgage mandates two separate types of mortgage insurance premiums. The first is paid in full up front if it cannot be financed into the mortgage, and the second operates through monthly payment. Houses attached with an FHA loan have to be appraised by an FHA approved appraiser.
The upfront mortgage insurance premium is 1.75% of the home loan. This number does not change based on the credit score of the applicant. This amount is either paid at the outset through settlement charges, or it can be rolled into the mortgage itself. An annual mortgage insurance premium is charged on a monthly basis. This will generally be fixed into the mortgage payment. The particular amount depends on the borrowers loan-to-value ratio and the length of their loan.
Although FHA loans are available to a larger group of people, there are specific stipulations and charges associated with them
What Do I Need To Qualify?
There are a number of additional stipulations required to apply for an FHA loan.
- The applicant must have a Social Security number, claim lawful residency in the United States, and be an adult.
- An applicant is only eligible for an FHA loan when the purchasing property will be a primary residence.
- The minimum down payment of 3.5% is mandatory, although it can be gifted by family member.
- The applicant must of work for the same employer for the past two years or have a steady and stable employment history.
- The minimum credit score for maximum financing and the minimum down payment is 580.
- For a maximum loan-to-value of 90% and a minimum down payment of 10%, the minimum credit score is between 500 and579.
- If you have a history of bankruptcy, an FHA loan is still within the realm of possibility. Generally, you must have decent credit in the time period following the bankruptcy, and the bankruptcy must be from at least two years ago.
FHA loans allow many Americans to achieve the dream of owning their own home. Before determining whether an FHA loan is best for you, verify that you meet all of the criteria listed above.