Buying a Home with an FHA Loan
Buying a home is such a tremendous accomplishment in your life, and you hope to get everything right along the way. One area you wouldn’t want to go second guess is choosing the right mortgage option to finance your dream home. Having a variety of loan options available, you hope to select an affordable mortgage that won’t cause strain and stress during either the application process or the repayment period.
Well, perhaps you have heard about the Federal Housing Administration (FHA) loan as an option. What is it? Who is qualified for it? And how does it work? Please keep reading to get these and more insights on what it takes to buy a home with an FHA loan.
What Is an FHA Loan?
A Federal Housing Administration (FHA) loan is a mortgage option offered by private lenders, banks, or credit unions and insured/guaranteed by the FHA. Buyers may pay a minimum of 3.5% down payment and have a credit score of at least 580 to qualify (Check your credit now for free). Nevertheless, provided you can make a down payment of 10%, you are still eligible for an FHA-backed loan if your credit score range is from 500 to 579. Therefore, it’s suitable for first-time homebuyers or individuals with small savings or credit challenges.
FHA-approved lenders are the only ones allowed to issue FHA-insured loans. The loan can be used to buy or refinance various houses, including single-family houses, multi-family homes (up to 4 units), townhouses or condos. You cannot use an FHA mortgage to buy investment properties that you will not occupy.
FHA Loan vs. Conventional Loans
Conventional loans require higher credit scores and down payments as high as 20%. On the other hand, it’s easier to get an FHA-backed loan with lower credit scores and little deposit. The fact that a federal department guarantees the loan also makes lenders offer more flexible loan terms and requirements.
How FHA Mortgages Work
If you’re a U.S citizen, a permanent resident alien, or a non-permanent resident with proof of work in the U.S, then you are eligible for an FHA mortgage.
As mentioned earlier, you have to meet the specific lender’s credit and down payment qualification threshold to get the loan. The loan process is not much different from a conventional one. You’ll have to approach an FHA-approved lender, discuss all the income and financial factors, and then develop the right amount you can borrow.
FHA-insured loans are not limited by income, geographical locations, or repeat buyers. For instance, if you have bought a house before, you can still qualify for the loan. However, if your current house is FHA-financed, you are ineligible for an FHA loan unless you sell the former home first.
There are limits for the FHA mortgage amount you can borrow, yet these limits vary from county to county. As of 2020, the limit varies from approximately $330,000 to $765,000. For example, in San Francisco County in California, the highest limit is $765,600. A qualified lender can help you determine the limit for your county.
Other FHA Loan Requirements
You can borrow an FHA mortgage if you have a debt-to-income ratio of less than 50. This means you can’t have a monthly debt payment of more than 50% of your pretax earnings and still qualify for the loan.
The property you’re trying to buy will be subject to an FHA appraisal. Besides the regular home inspection, the home should meet fair market prices, accepted safety standards, and be in a livable state as determined by an FHA Appraiser that will be ordered by your lender.
You’ll be required to pay Mortgage Insurance Premium (MIP) during the life of the loan and also move in within 60 days of closing.
What Are the Pros of FHA Mortgages?
Questioning if you should go for an FHA-backed loan? Here are the summarized benefits a homebuyer can reap from the program.
- The loan has low down payments and closing costs.
- It has easy credit score requirements and loan terms.
- Compared to conventional loans that require a debt-to-income ratio of 36% at most, FHA loans can be obtained with below 50% of the debt-to-income balance.
- FHA-backed loans are more lenient with interest compared to other low-down-payment alternatives.
- Gift money is allowed for the down payment if you need help coming up with the 3.5% down payment.
- The refinancing process of FHA-insured loans is smooth.