If you are interested in buying a home, then you are required to either put 20% down or the full payment. What do you do if you do not have the money? You must be having sleepless nights and anxious days. There is a thing called home mortgage loan. Well, not all home mortgages are suitable or appropriate for you, but FHA mortgages are the most accessible type of loan you can take for yourself. The low credit score requirement along with a minimum down payment of 3.5% will allow the homebuyer to qualify for an FHA loan.
The FHA loans are prevalent among first-time homebuyers. Many people have the wrong idea or none at all about this loan. You might have heard about it earlier, but we will talk more about FHA loans in details.
What is an FHA loan?
The FHA home loans are home mortgages that are insured by the Federal Housing Administration. The FHA provides mortgage insurance on loans made by FHA-approved lenders. It is under the jurisdiction of the Housing and Urban Development, a government agency. There is an upfront mortgage insurance cost that is added to the loan amount. Then there’s the monthly mortgage insurance premium (MIP). The mortgage insurance premium is for the life of the loan and cannot be canceled. It acts as a security for lenders in the event of future default by the home buyer.
The FHA credit requirement
FHA has the most lenient credit score requirement. A minimum FICO score of 580 is required to qualify for a 3.5% down payment. Borrowers with a middle-FICO score below 580 all the way down to 500 can still be eligible for an FHA loan if they come up with 10% down payment. Some restrictions will apply depending upon the lender originating the loan. These are called “overlays” or rules imposed by a specific lender. Although the Federal Housing Administration states that every borrower with scores less than 580 can qualify, it is up to the lender to extend the mortgage loan, hence, the overlay. FHA does not extend home loans directly to borrowers; they only insure the loan against default. An FHA-approved lender originates FHA loans.
Most people know and heard of FHA loans before. Some think it is for the people with low income or they are available to the individual with bad credit. However, this is not the case. Each borrower must qualify base on their credit, income, and assets.
A first-time home buyer is defined as anybody who has not bought a house in the last three years. Most first-time buyers favor an FHA due to their easy credit and down payment requirement.
If you are someone with low- to moderate-income, then you are an excellent candidate to take this loan. The FHA allows the borrowers with more flexibility on their debt to income ratios than the conventional loans. In many cases, the conventional loans become a matter of a headache to the borrower. FHA allows a higher debt-to-income (DTI) ratio than a conventional loan. FHA can go as high as 55% DTI whereas conventional loans cannot exceed 45% ratio. What does it mean? Simply put, a borrower can buy a more expensive house with the additional 10% allowable ratio.
These are some of the small things that you need to consider before applying for an FHA loan. If you are in the market to buy a house, your dream house or want to build one, an FHA loan is one of the best government-insured mortgage loans you can ever get.