What is an FHA Loan?
If you are a first-time home buyer, an FHA loan can be a great mortgage choice. You don’t need to save a huge down payment, yet it is easy for you to meet the FHA loan requirements.
One of the main differences between an FHA loan and a conventional mortgage is that an FHA loan is backed by the Federal Housing Administration (FHA). This means that the FHA protects the lender financially in case a borrower can no longer make their mortgage payments. Even though some of this risk is passed onto to the borrower through their mortgage insurance expense, these payments also make qualifying for a mortgage easier.
In general, applying for a mortgage means that you need to have healthy and happy finances. FHA loan requirements tend to be more relaxed. For example:
- As stated earlier, you don’t need a large down payment. Currently, you only need 3.5% of the home price.
- Your credit only has to be reasonable.
- Your FHA loan requirements for income are more flexible than with other mortgages.
Overall, your mortgage lender will look at your entire financial picture instead of nitpicking on one or two details, making your chances of getting an FHA loan quite good.
Do You Qualify for an FHA Mortgage?
There’s more to an FHA loan than merely a lower down payment. Both you and the house in question must meet some basic FHA loan requirements. Let’s see what those are.
- The home: First, the type of home – fully detached, semi-detached, condo, town home – doesn’t matter; they are all eligible. However, you must plan to live in the home you want to buy; rentals need not apply.
- Your mortgage: There is maximum amount you are allowed to borrow for your FHA loan, and that depends on two things: 1) the loan-to-value ratio of the property, and 2) the geographic location of the home.
- Your credit score: You need a credit score of at least 580, which is doable for most people. Please be advised that certain restrictions will apply. If you don’t have a credit score, read on to discover information on non-traditional credit histories. If you’ve declared bankruptcy in the past, you may still meet FHA loan requirements but only after a two year waiting period.
- Your income: FHA loan requirements recommend that you have a documented job for at least two years, and can reasonably expect to remain working there for another three. More is better!
About That Mortgage Insurance...
As stated earlier, FHA loan requirements say that you need mortgage insurance on your loan to offset the lower payments. It equals about 1.75% of your loan amount. For example, if you are looking to borrow $100,000 loan amount your final loan amount would be $101,750. But who has extra money at the time of closing? To make your mortgage insurance more affordable, this amount is rolled into your loan for one easy payment. A monthly mortgage insurance premium will also be added to your mortgage payment.
Should You Consider an FHA 203K Loan?
If you want to buy a home that requires extensive repair work, an FHA 203K loan might be the right choice. This FHA loan allows you to combine a home loan and a renovation loan all in one. Note that there are additional FHA loan requirements about the type of work that needs to be done and borrowing limits.
What About Other Types of Loans?
An FHA loan isn’t the only loan out there. Below is a handy chart you can use to compare the differences between USDA, VA, and FHA loans.
What Can You Do?
If you think you meet the FHA loan requirements, contact a Loan Officer at Shamrock Financial. They can review your finances, help you find eligible properties, and make home ownership yours at last.