FHA loans make it possible for many people to obtain a mortgage for buying a home who may not otherwise qualify with a conventional loan.
What Are FHA Loans?
FHA loans are home loans that are guaranteed by the U.S. Federal Housing Administration (FHA). Private lenders such as credit unions and banks issue the loans, and they are backed by the FHA. If you fail to repay your loan, then the lender will be paid by the FHA. Due to this guarantee from the federal government, lenders are willing to make large mortgage loans is cases that they otherwise would not be willing to approve.
FHA Loan Benefits
FHA loans are not right for everyone, but in some situations they are a great fit. Here are some of the major benefits:
– Small down payment: With an FHA loan you can purchase a house with as low of a down payment as 3.5 percent. Convention loans generally required you to have either higher credit scores and higher incomes for a smaller down payment or will simply require a bigger down payment than 3.5 percent.
– Using others’ money: With FHA financing it is much easier using gifts for closing costs and the down payment.
– Prepayment penalty: There is no prepayment penalty on an FHA loan.
– Assumable loans: If your FHA loan is assumable a new buyer will be able to take over your loan and pick up right where you left off. The new buyer might be able to enjoy a lower interest rate than what is currently available. This can make is easier for you to sell your home in the future.
The opportunity to reset: It is easier to be approached on an FHA loan than a conventional loan if you have a recent foreclosure or bankruptcy.
– Repairs and Home Improvement: The FHA 203K programs all you to pay for your home improvement expenses.
Qualifying For FHA Loans
An FHA loan is usually easier to qualify for than a conventional loan. These loans make home ownership accessible to more people. Lenders who offer FHA loans are more willing to approve loan applications since the government guarantees the loans.
Check with multiple lenders: Some lenders do have stricter requirements than the minimum FHA ones. It’s always a good idea to shop around.
Income Limit: There is no minimum income amount that is required on an FHA loan. You must have to be able to demonstrate you have the ability to repay the loan.
Debt to Income Ratios: You will need to have a reasonable ratio in order to qualify for an FHA loan. Usually it is best to have 31-43% debt or less, but sometimes you can get approved up to 50 percent.
Credit Scores: To make a 3.5 percent down payment, you can have a credit score as low as 580. For larger down payments you will usually need 500 to 580 credit scores.
Loan amount: The FHA has limits on the amount you can borrow, which will depend on your local area.
So now that you know what are FHA loans, it is time to do some research and speak with a few FHA-approved lenders to see if this type of loan is right for you.