As a result of the Great Depression of 1929, few families were able to buy homes, and many of them who had owned homes lost them due to forced sales and foreclosures. FHA mortgage conditions were difficult to meet and loans were limited to 50% of the market value of the property. After three to five years of interest payments only, a final lump sum payment that was essentially the principal amount of the loan became due.
In 1934, the Federal Housing Administration was created to help the nation emerge from the crisis and boost property by making mortgages available to more people. The FHA program has reduced payment requirements; qualified borrowers based on their ability to repay a loan (rather than knowing whom they knew); establishes the loan amortization schedule, in which capital and interest payments are made each month; and introduces longer loan terms.
Today, FHA offers mortgage insurance on loans for single-family and multi-family homes made by FHA-approved lenders in the United States and its territories. It is important to note that the FHA is a mortgage insurer, not an FHA mortgage lender: FHA provides loans so lenders can offer better deals. Many first-time home buyers can qualify for FHA loans that generally have lower payments, reasonable credit expectations and more flexible income requirements. Here we look at the main reasons why an FHA loan could be right for you.
If you do not have much money saved for a down payment, an FHA loan might be a good choice. For example, if the purchase price is $ 200,000, you could get a mortgage with only $ 7,000 less ($ 200,000 X 3.5% = $ 7,000). You will pay 20% less (or $ 40,000 for the same $ 200,000 home) on many conventional mortgages. For some people, an FHA mortgage could be the difference between becoming a homeowner and continuing to rent.
Low installments have a cost. Whether you have a conventional loan or FHA, you will have to pay for mortgage insurance if you reduce less than 20%, either in the form of private mortgage insurance (PMI) for conventional loans or a mortgage insurance premium (PIM). ) for FHA Loans. (FHA loans also require an upfront fee, once the loan is issued.) The rate you pay depends on the length of the loan, the loan-to-value ratio (LTV) and the size of the loan.
Recent changes affect how long borrowers are required to pay PMI on FHA loans. If your FHA loan originates before June 3, 2013, the FHA requires that you pay the PIM for five full years before it can be waived if the term of your loan is greater than 15 years, and only if the loan balance reaches 78 %. the initial price of the house (the purchase price indicated on your mortgage documents).
For loans after or after June 3, 2013, new rules apply: If your initial LTV was 90% or less, you will need the PIM for 11 years or until the end of the loan, whichever comes first; However, if your LTV ratio was above 90%, you will pay the PIM for the full term of the loan or 30 years. This is more expensive than PMI for a conventional loan, which can usually be canceled when your equity in your home reaches about 20%. See How to get rid of private mortgage insurance for more details.
High debt-to-income ratio
The debt-to-income ratio (DTI) measures the amount of debt you have relative to your overall income. Lenders, including FHA mortgage lenders, use DTI as a means of assessing your ability to handle the payments you make each month and to repay the money you have borrowed.
To calculate your DTI, add up your total recurring monthly debt (including mortgage, student loans, auto loans, alimony, and credit card payments) and divide by your gross monthly income (what you earn each month before taxes and other deductions are withdrawn). If your total monthly recurring debt, for example, is $ 2,000 and your gross monthly income is $ 6,000, your ITD would be 33% ($ 2,000 $ 6,600 = .33 or 33%).
A low ITD demonstrates a good balance between debt and income. Lenders like the number to be low because borrowers with a lower debt ratio are more likely to handle monthly debt payments. On the other hand, a high DTI shows that you have too much debt for your income.
In general, 43% is the highest ITD you can have and still get a conventional mortgage. The FHA, however, has some flexibility and allows some borrowers to have ITDs of up to 56% or 57% – for example, those who can make a large down payment, or those with significant savings and track records solid credit. If you have the same $ 6,000 gross monthly income from the previous example, your total recurring debt could be as high as $ 3,420 to qualify for an FHA loan, compared to $ 2,580 for a conventional loan.
Lower credit score.
A credit score is a number that helps lenders evaluate your credit report and estimate how risky it is to give credit or lend money. Lenders get your credit score from the three major credit reporting agencies – Equifax, Experian, and TransUnion. The most used credit score is the FICO score, based on five factors:
- 35%: payment history
- 30%: amounts due
- 15%: credit duration
- 10%: new credit and recently opened accounts
- 10%: types of credits used
In general, loans granted for FHA loans are more flexible than those for conventional loans. Although other factors are taken into consideration, a credit score of at least 580 is required to receive maximum funding. If your credit score is between 500 and 579, you will probably still be approved (depending on other factors), but you will have to pay a larger down payment (for example 10%).
If you have a history of non-traditional credit or insufficient credit, you can still benefit from an FHA loan if you meet certain conditions; In fact, your lender may be able to approve an FHA loan, even if you do not have a credit score. These situations are assessed on a case-by-case basis (consult your lender for details on your particular situation).
The Bottom Line
FHA provides home loans throughout the United States and its territories, including Guam, Puerto Rico, and the US Virgin Islands. In order to qualify for an FHA loan, the property must be your primary residence and must be occupied by the owner (ie, you must live there). Many first time home buyers can qualify for FHA loans, even with lower credit scores and/or debt-to-income ratios higher than what you need for a conventional mortgage.
There are many types of FHA loans, and the exact rates and requirements may vary depending on the lender. A mortgage is a long-term financial obligation, and care must be taken to understand the different loan products available and your particular options before making a decision. Read Is an FHA mortgage still a bargain? before you commit.