If you are finally thinking about getting a house, you should entertain the possibility of getting an FHA (Federal Housing Administration) loan. The loan is designed for low to moderate-income borrowers. It had its roots during the Great Depression back in 1934. Unlike traditional home loans, FHA loan requires a lesser minimum down payments or lower credit scores.
It is the private lenders (like banks and credit unions) that issue this type of loan. FHA, on the other hand, will provide the necessary backing to complete the process. In the event that you do not repay your loan, the FHA will pay the lender. Before you consider FHA loans, it is important that you know some basics. Here’s a guide to FHA loan basics:
Benefits of FHA loans
You have to know that FHA loans are not for everyone. Its main appeal is it can make it easy for your family to buy a property. However, you need to remember that the benefits always come with adjustments. Benefits of FHA loans include the following:
- Small down payment: as mentioned, FHA loan requires a lesser minimum down payment. This mortgage scheme will allow you to buy a home with a down payment as low as 3.5%. Traditional loan programs require a larger down payment. If you have more than 3.5%, it is better to make more substantial payment so you can save on interest costs.
- Assumable loans: if your FHA loan is assumable, a buyer can pick up where you left off. The best thing is that buyers can benefit from lower interest costs because you already survived the highest-interest rates.
- Opportunity to reset: if you have a history of foreclosure or bankruptcy, FHA loan will be easier to get. This will ultimately give you a chance to reset.
How to qualify
Now that you know the benefits, you will wonder if you qualify. As mentioned earlier, the loan is not for everybody. It is important that you know if you qualify or not so you can get on with it. The qualifications of FHA loans include the following:
- Income limits: you must know that there is no minimum income required to qualify for the loan. However, you need to demonstrate that you have enough income to repay the loan.
- Debt to income ratios: you also need to a reasonable debt-to-income ratio to qualify. You have to remember that the amount you spend on monthly loan payments should be low. Before you commit, you need to calculate the mortgage payment and model your payments.
- Credit scores: for those with low credit scores, they have higher chances of getting approved. Your score can be as low as 580 if you want to make a 3.5% down payment. If you consider bigger down payment, your score can potentially be lower.
- Loan amount: the FHA will limit how much you can borrow. Generally, you are limited to loan amounts in relative to home prices in your area.
At the end of the day, it is always prudent to do your research before you decide to take action. Do not forget to reach out to FHA mortgage professional. The advisor will explain everything so you will know which programs are right for your circumstance.