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What You Need to Know About the FHA Loan

The Federal Housing Administration (FHA) loan is increasingly becoming popular among first time home buyers. It requires a low down payment of 3.5% for people with a credit score of 580 and above. If your score lies between 500- 579, you can still get the loan. However, you’ll need a 10% down payment.

An FHA loan is quite friendly. It’s almost impossible to get approved for a conventional mortgage with a credit score of below 620.

It’s imperative to note that the lower the credit score, the higher the interest rate; therefore, you need to work on your credit.

How do FHA loans work?

With this loan, you can get up to 96.5% of the value of the property. FHA charges an upfront mortgage insurance premium of 1.75% of the loan value to cover the risk of default. Let’s say you’re issued with a loan of $450,000. You’re required to pay an upfront mortgage insurance premium of 1.75% x 450,000= $7,875.

On top of the upfront charges, there’s an annual premium based on the loan value. Despite the name, you should make the monthly payments. This varies based on the total amount of the loan and the length of the loan.

Benefits of an FHA loan

Smaller down payments

– Allows low credit scores

– Flexible qualification guidelines

– You can qualify despite being bankrupt in the past or having experienced financial challenge

– The loan is assumable. This means, if at some point you decide to sell the property, the buyer can “assume” your loan

– Allows down payment gifts; friends and family can donate money to cover part of your down payment

Drawbacks of an FHA loan

– You’ll pay for two mortgage insurance premiums

– It limits how much you can borrow

 

There are property restrictions- the property should pass FHA Guidelines

Higher Interest Rates

It allows people with poor credit

FHA loan requirements

What do you need to qualify for an FHA loan? Let’s look at important FHA guidelines:

You should be able to verify your income and show proof of income

3.5% down payment is required if your FICO Score is above 580

10% down payment if your FICO Score is between 500-579

Money to pay the mortgage insurance premiums

Debt to income ratio of less than 43%. This is calculated by adding all your monthly debt payments and dividing the total by your monthly income before taxes. For instance, assume you have debts adding up to $1000 per month (student loan, auto loan, etc.), and your gross income is $4000 per month. Your debt to income ratio is 37.5%. Hence, you qualify since the 37.5% is less than 43%

The home must be your primary residence. Investment properties and second homes don’t apply.

How do you get an FHA loan?

It’s important to note that the Federal Housing Administration doesn’t issue any money. You get it from FHA approved lenders, such as banks and credit unions. FHA only guarantees the loan.

The market is flooded with lenders. You can, therefore, contact different lenders to get their rates and fees. The process is straightforward and free, and you don’t have to provide any personal information. Once you get your preferred lender, you can go ahead and contact them.

FHA loan limits

Loan limits are based on the cost of living of the state you’re in and the type of property you need (single vs. family unit.)

As of 2019, the FHA floor (lower) limit was set at $314,827, while the ceiling (higher) limit was set at $726,525.

To find out the mortgage limits in your area, click here.

 

FHA versus Conventional loan: Which is easier to get?

Most people assume that an FHA loan is easy to qualify for. That’s not entirely true. As mentioned earlier, there are certain requirements needed, such as debt to income ratio of less than 43%, 3.5% down payment, steady income, and a credit score of above 500. To qualify for a conventional loan, you need a credit score of at least 620, and the down payment lies between 3% to 20%.

Lenders are willing to approve FHA loans to borrowers with low credit because of the insurance protection offered. Since it is government-insured, most lenders are not as strict when it comes to approving the loan. Hence, it’s easier to get approved as compared to conventional loans. But that does not make it easy to qualify for, as you need to meet requirements in every respect.

The FHA requirements are not as complicated. However, you should compare them with conventional loans because sometimes the pros of one can outweigh the other. Fha is not always a good deal. Some lenders can misguide you, and you may end up getting a raw deal.

Have you used an FHA loan? How was your experience? If not, what do you think of this option?

We’d love to hear from you. Let’s interact in the comment section.

Caroline Wanjiru

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