Interested in buying a home, but your credit score is not too good and you haven’t saved too much money for a down payment? Then an FHA Loan might be the answer.
FHA Loans short history
After the crisis in 1930s, mortgage lenders needed adequate insurance, in case the borrower defaulted, but there was also a need to stimulate the house market, making mortgages affordable and accessible for people.
And, since not all had excellent credit scores and their down payment was small, FHA Loans appeared.
What is an FHA Loan
An FHA Loan is a type of government-backed mortgage insured by the Federal Housing Administration (FHA), hence the name. It’s widely used by people who are not into a great financial situation and still want to buy a home: those with little savings for a down payment and not a great credit score.
Main FHA Loan Requirements
- credit score of 580+
- down payment of at least 3.5%
There’s a workaround .. if your credit score is smaller (between 500 and 579) you can still qualify, but you’ll need a down payment of at least 10%.
Just like with most lending options, a low credit score means worse lending conditions (namely a higher interest).
So, if you are a first time home buyer and your down payment isn’t too big, make an effort to get a better credit score, so that you can get some better mortgage conditions.
More FHA Loan requirements
- steady employment history or at least 2 years with the last employer
- valid SSN (Social Security Number), lawful residency in the US and of legal age to sign a mortgage
- you need a property appraisal from an FHA – approved appraiser
- your front-end ratio (mortgage, HOA fees, taxes, mortgage insurance, homeowners insurance) has to be less than 31% of your gross income. You might get a higher percentage (until 40), but under special conditions
- your back-end ratio (all your debt) needs to be less than 43% of your gross income. You can get approved for a higher percentage (up to 50) under special conditions
- you need to be 2 years out of bankruptcy and have reestablished good credit
- you need to be 3 years out of foreclosure and have reestablished good credit
- the property needs to meet some minimum standards at appraisal or you’ll need to pay the repairs at closing.
FHA Loan downside
The biggest disadvantage is that you need to pay two types of insurance premiums:
- Upfront Mortgage Insurance Premium (UFMIP) – 1.75% of the home loan. You can pay it upfront, at closing, or it can be rolled into your mortgage.
- Annual MIP (charged monthly) – from 0.70% to 1.05%, based on the loan-to-value ratio (LTV), loans size and length of loan.
How do you get an FHA Loan?
The FHA (Federal Housing Authority) has to approve the lender who will help you get an FHA loan. It’s easy to find FHA lenders on various real estate websites. You can also find New York FHA loan deals with Merita Capital Funding.
As soon as you find few potential lenders you are interested in, submit a loan request and you’ll receive quotes really soon.
Armed with all this data, run some numbers and get ready to close the deal.
This is just some basic info about FHA Loans. Discuss all details with your lenders and, before this, make sure you save as much as possible for your down payment and improve your credit score.