Federal Housing Administration (FHA) loans allow lower down payments, lower incomes, and lower credit scores. They make homeownership more accessible for first-time and lower-income buyers. Although there are specific requirements and limits on FHA loans, it could be the perfect mortgage option for you.
How FHA Loans Work
FHA loans were set up by the federal government to help stimulate the housing market and make mortgages more accessible. The FHA does this by backing up the loans, assuring lenders that they will repay the mortgage if the borrower defaults on the loan. This security allows lenders to qualify borrowers with lower incomes, lower down payments, and lower credit scores.
Qualifying for an FHA Loan
There are a few basic qualifications for FHA loans, including:
- The home must be a primary residence (no second homes or rental properties).
- The borrower must have a steady, two-year work history.
- The home must be appraised by a qualified FHA appraiser, and it must meet specific appraisal requirements.
- Borrowers must be at least three years out of foreclosure and at least two years out of bankruptcy.
- The total cost of the loan must be below the FHA’s mortgage limit, and this varies by state.
Other qualifications are:
- Low down payment options available
- The borrower must have a credit score of at least 620
- There is no income requirement, but borrowers must meet debt-to-income ratios:
- Mortgage payment plus all fees (HOA, mortgage insurance, taxes) must be less than 31% of the borrower’s gross income (income before taxes and other withholdings).
- Mortgage payment plus all other monthly debt, like car and credit card payments, must be less than 43% of the borrower’s gross income.
While FHA loans can be ideal for many borrowers, there are some trade-offs. FHA loans require mortgage insurance. According to the FHA, “mortgage insurance is a policy that protects lenders against losses that result from defaults on home mortgages.” Two mortgage insurance premiums are required, one upfront (this can be financed into the loan) and one annual premium.
Is an FHA Loan Right for You?
FHA loans offer buying power for those that may not qualify for a conventional loan. With relatively a low down payment and a chance to start fresh in cases of foreclosure, lower credit scores, or bankruptcy, an FHA mortgage may be the perfect fit for you. If you’d like to discuss your options regarding an FHA or other loan, contact us today!