FHA Loan 101 – What You Need To Know About It

Buying a new home is exciting! It’s not only a dream come true for many families, but it’s also a very large investment. There are many types of loans to consider including the FHA loan.  It can be overwhelming to learn and research everything that is involved in the home-buying process. From qualifying for a loan to winning the offer on your dream home, there are many steps involved. If you are a first-time buyer or someone who hasn’t bought a new home in a while, you will need an experienced agent to help guide you through the whole process.  

First-time buyers may qualify for a Federal Housing Administration (FHA) Loan. They are especially popular with first-time buyers because they allow you to finance homes with down payments as low as 3.5%. This is perfect for young families ready to buy their first home but do not want to wait years to save up for larger down payments.

What Is The FHA?

The FHA is part of the U.S. Department of Housing and Urban Development (HUD). Our country’s history of the stock market crash, the Dust Bowl drought, and the Great Depression all had a hand in a housing market crisis. By early 1933, nearly half of American homeowners had defaulted on their mortgages. The FHA was created as part of the National Housing Act of 1934 to help stop the influx of foreclosures and make homeownership more affordable. It established the 20% down goal by insuring mortgages for up to 80% of the home’s value. Before that, homeowners were limited to borrowing 50% to 60%. Today, the FHA insures loans for approximately 8 million single-family homes.  

What Is An FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration. Although the government insures the loan, they are offered by FHA-approved mortgage lenders. The FHA insures mortgages issued by lenders such as banks and credit unions. The insurance protects lenders in case of default on the loan. This is why FHA lenders are willing to offer favorable terms to borrowers who might not otherwise qualify for a conventional mortgage loan.

How FHA Loans Work

FHA loans come in fifteen-year and thirty-year terms with fixed interest rates. FHA loans have flexible underwriting standards that allow borrowers who may not have the best credit or high incomes and cash savings the opportunity to become homeowners. The borrower must pay FHA mortgage insurance to protect the lender from a loss if you default on the loan. Mortgage insurance is required on most loans when borrowers put down less than twenty percent.

How To Qualify For An FHA Loan

There are several requirements to qualify for an FHA loan.  Some lenders may have additional stipulations, but the basics to qualify are: Verifiable employment history of at least two years:

  • Income verifiable through pay stubs, federal tax returns, and bank statements
  • FICO score of 500 to 579 with 10% down or FICO score of 580 or higher with 3.5% down
  • The loan is used for a primary residence
  • The property is appraised by an FHA-approved appraiser and meets HUD property guidelines.
  • Your front-end debt ratio (monthly mortgage payments) shouldn’t exceed 31% of your gross monthly income.
  • Your back-end debt ratio (mortgage, plus all monthly debt payments) shouldn’t exceed 43% of your gross monthly income.

Many people don’t know that FHA loans are not just for first-time homebuyers. An FHA loan can help after a natural disaster, such as floods, wildfires, earthquakes, hurricanes, etc. If you are in a zone declared a national disaster by the U.S. President, the FHA 203(h) Mortgage Insurance for Disaster Victims program can provide 100% financing for the purchase or reconstruction of severely damaged homes destroyed in a natural disaster.

You may also be able to use an FHA loan to help make repairs and upgrades to your home. If you buy a fixer-upper or want to renovate your current home, the FHA has several renovation loan programs.

If you need assistance navigating the FHA loan programs to assist with purchasing your new home, contact the Torelli Properties Group

 

 

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