An FHA loan can be a great choice for many families who plan to buy a home. The loan, which is insured by the Federal Housing Administration, was developed in the 1930s to make the homebuying process easier for buyers and safer for lenders. Since FHA loan rates are generally lower and requirements are more lenient, it’s one of the most popular home financing options in the U.S. for homebuyers.
Basics of the FHA loan
The FHA loan is ideal for many because the buyer’s credit doesn’t necessarily have to be at its peak. In addition, down payments can be as low 3.5 percent, as long as the buyer’s credit is around 580 or more. Those with credit in the lower range will usually pay a higher down payment. The FHA loan is a good option for those who may not qualify for a conventional loan, and is a smart choice for lower income families who cannot afford to put a 20 percent down payment on their home. It’s also a strong option for the lender, as the government insures these loans and makes sure there’s minimal risk.
Requirements for FHA loan approval
Besides having an acceptable credit score, buyers must also follow a number of other conditions to be approved for an FHA loan. For instance, steady employment is a must. In addition, although homebuyers may have had a previous bankruptcy or foreclosure, a certain number of years must have passed and the buyer must have re-established acceptable credit.
Another essential requirement is that the borrower’s mortgage payment and related taxes and insurance needs to add up to less than 31 percent of their income. Aside from this, the borrower’s credit card spending should also match up reasonably with their income. As long as potential homebuyers meet all of the conditions, they can usually qualify for an FHA loan.
FHA loan insurance premiums
With an FHA loan, you are required to pay two mortgage insurance premiums: one, the upfront mortgage insurance premium, must be paid in full initially, while the other, the annual MIP, is paid monthly. The upfront cost is calculated as 1.75 percent of the loan amount. In order to calculate your specific monthly premium, you must take a number of factors into account, including the loan amount, term and the loan-to-value ratio. Although the FHA loan allows lower standards than a typical private loan, these additional fees are necessary.
Financing your home with an FHA loan
Unlike some other financing options, the FHA loan allows gifts from family members or others to pay for the down payment and other costs. In addition, even though this loan is generally used by families with lower incomes, there is no income limit. The FHA also allows buyers to take out a loan for repairs. This product, called a 203(k), is based on the expected value of the home after repairs are done. This can be useful for homebuyers who want to renovate their new home but don’t have the necessary cash available.
How to find an FHA loan lender
You can search online on a real estate marketplace for lenders that are offering FHA approved loans. The Federal Housing Authority itself doesn’t distribute loans, but insures lender’s loans. Essentially, if the borrower fails to make payments, the FHA’s insurance protects the lender from any loss.
Before deciding on a lender, you’ll want to compare FHA loan rates and costs and see which loan is right for your specific situation. It’s also good to keep in mind that despite the leniency of the FHA requirements, certain lenders may also have their own stricter requirements.
FHA loans versus standard loans
For many, an FHA loan is a great choice and can help finance home buying for those who wouldn’t otherwise qualify for a conventional loan. For some potential homebuyers, however, this loan might not be the best option. For instance, compared to a private loan, the FHA loan tends to require higher premiums, both with the one-time upfront premium, and the monthly premium. If you have good credit, haven’t had a bankruptcy and meet other conditions, a standard loan can sometimes be a better option. Although standard loans usually have higher down payments and interest rates, you may be able to find options comparable to FHA loan rates.
Finding the best option for your family
Overall, it’s best to know your options and compare the costs and benefits that different lenders are offering. Make sure to conduct up-to-date research and be informed of any changes in governmental policy and requirements. If it turns out that an FHA loan is right for you and your family, it can be a great asset for financing your dream home.
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