FHA Loans Simplified

If you’re looking to buy your dream home, you may want to consider an FHA Loan. FHA stands for Federal Housing Administration, which is part of the U.S. Department of Housing. An FHA loan is a housing loan that is insured by the Federal Housing Administration. FHA loans allow mortgage lenders to offer home buyers better deals than what may be available through conventional loans. These loans are available for single-family detached homes, 2-4 unit homes, condominiums, mobile homes, and manufactured homes.

How does an FHA loan work? In order to get an FHA loan, you are required to purchase mortgage insurance. Mortgage insurance lowers the risk for the lender who is making a loan to you so that you may be able to qualify for a loan that you might not otherwise be able to get. Your mortgage insurance will be included in your total monthly payment that you make to your lender, your costs at closing, or both. Once you are approved for the FHA loan, you’ll receive potential advantages like easier credit requirements, lower down payments, and lower interest rates. FHA loans can help homebuyers who may have less-than-perfect credit or who may not have enough savings available for a large down payment.

FHA Down Payments
There are many benefits that could come from a FHA loan. Perhaps the biggest advantage of FHA loans is that they allow for lower down payments than what may be required for conventional loans. Despite the long-standing perception that a down payment of 20% is needed for a mortgage, the National Association of Realtors recently found that 23% of home buyers end up paying a median down payment of 66% to 74%. This could present a large hurdle for many would-be homebuyers. FHA loans, however, let you make a down payment as low as 3.5% if you meet all the requirements. This would save you a large sum of money on your down payment that could help contribute to other moving expenses.

FHA Credit Score Requirement
Your credit score determines your ability to receive an FHA loan and the down payment amount you’ll need. For FHA loans, there are two tiers of credit score minimums. To qualify for a down payment of 3.5%, your credit score needs to be 580 or higher. For a down payment of 10%, your score should be in the 500-579 range. Don’t worry if your score isn’t in the first tier, even this lower range is more lenient than conventional loans, which typically require scores of 620 and above.

If you plan on applying for an FHA loan, it’s important to check your credit score on a regular basis. You’ll want to make sure that you’re doing what you can to maintain or improve your score as needed. Having a credit score of 580 or higher could potentially save you a lot of money with the lower down payment requirement.

Other FHA Requirements
After you’ve achieved an eligible credit score and provided the necessary down payment for an FHA loan, there are a couple other basic requirements to complete. As with conventional loans, you will need to show documented, steady employment and income. This can be in the form of pay stubs or bank statements for freelance workers. You will also need to maintain a debt-to-income ratio of 50% or less, and not have had a foreclosure in the prior three years. FHA loans, unlike conventional loans, also require you to live in the home as your primary residence.

Mortgage Insurance Premium
The mortgage insurance that you are required to purchase for an FHA loan is called your “mortgage insurance premium” or MIP. Regardless of the amount of your down payment, two types of MIP are needed to insure an FHA loan. The first is upfront insurance that is paid as a lump sum upon closing of the loan. Currently, the upfront mortgage insurance premium is 1.75% of the base loan amount for recent FHA loans and refinances. The second insurance required is the annual mortgage insurance premium, which is an ongoing expense you pay every year. This becomes less expensive as you pay off more of the loan and acquire more equity in the property. The rate of the annual premium ranges from 0.45% to 1.05%, and is paid as an addition to your monthly mortgage payment. Your cost for the annual premiums is determined by your loan-to-value ratio and mortgage term.

Your dream house does not have to be out of budget or unavailable with your credit score. With an FHA loan, you could receive easier credit requirements, lower down payments, and lower interest rates.