Homeownership is the pinnacle of the American Dream for so many people. It provides a unique sense of pride and security that also fosters belongingness and safety at different levels. If there is anything that families, couples, and young adults should strive and work hard for, it is having a home of their own.
The FHA home loan is a government insured mortgage that gives individuals and households a shot at homeownership minus the hefty down payment and financial-credibility requirements. It’s one of the best deals out there for anybody who’s seeking for a low down payment mortgage loan with relatively more lenient qualifying standards. As the name suggests, the Federal Housing Administration (FHA), which is under the U.S Department of Housing and Urban Development (HUD), guarantees the loans.
Guaranteeing the loan means that the FHA does not originate the loan. Rather, the guarantee protects the FHA approved lending institutions against borrowers defaulting on their mortgage payments. In turn, the insurance allowed lenders to lower their qualifications so that more housing opportunities are available to moderate and low-income homebuyers.
FHA home loans are open to all individuals who satisfy the criteria for qualification which include:
- A steady employment history and a reliable source of income (at least two years in the same company)
- U.S citizenship or lawful residency (applicant must have a valid social security number and be of legal age to sign a mortgage in his or her State)
- At least two years out of bankruptcy and three years from foreclosure
- Down Payment
FHA home loans require a minimum down payment of at least 3.5% of the property’s purchase price. The entirety of the funds doesn’t have to be from the buyers themselves as “cash gifts” from family members accepted mode of payments. Moreover, the lender or the seller may pitch in on the closing costs should they choose to do so.
The borrower’s debt-to-income ratio, which includes the mortgage loan, should be no higher than 41%. In addition, the mortgage payments, including the PITI, have to be lower than 31% of the borrower’s gross monthly income.
- Credit score
The ideal FICO score to qualify for an FHA loan is 580; however, lenders may lower this on a case-to-case basis. Usually, qualified applicants with lower credit scores are asked to produce a higher deposit than those who meet the set minimum.
Mortgage Insurance Premium
Based on the given criteria, the FHA loan does seem like the answer to every homebuyer’s dream. The 3.5% down payment alone is a great advantage over the 20% requisite of conventional loans. Where the FHA holds the most significant disadvantage, however, is in the insurance. The credit demands two insurance premiums in lieu of its relaxed qualification guidelines, which may cost you in the long run. That said, many people, first-time-home buyers especially, still consider the FHA loan as one of the most accessible out there.
If you’re interested in applying for the mortgage, the first thing you should do is to prequalify FHA loan with an authorized lender. FHA approved lenders are all over the country, but we suggest you start with the most reputable ones near you.
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