FHA Loan

What Is an FHA Mortgage Loan

An FHA loan is insured by the Federal Housing Administration. The features of an FHA loan include a low down payment and low closing costs. A borrower pays a mortgage insurance premium which protects the lender in the event of a default. An FHA loan allows for better rates and terms. A credit score of at least 580 is required for an FHA loan. Borrowers with debt higher than the allowed debt-to-income ratio can be approved with compensating factors such as a larger downpayment, good credit history, and cash reserves. Borrowers can qualify for an FHA loan 2 years after a bankruptcy, short sale, or foreclosure, which is shorter than the 4 year waiting period that was once required.

What is an FHA Loan?

An FHA loan is basically a loan that has been endorsed by the Federal Housing Administration, and is suitable for people who want to purchase their own homes for the first time. The reason why people opt for this is that the requirements are much less strict than conventional loans and the borrowers only have to put down a down payment of 3.5% This loan is suitable for people with low credit score, because you can apply with a score of 580 or higher. The borrowers that have a credit between 500 till 579 have to make a down payment of 10%. You should know that you will have to pay a high interest rate if your credit score will be low.

The FHA programs were introduced to the public in order to decrease the rate of foreclosures and reduce the number of defaults. In addition to this, its main goal was to make the loans accessible for the local population who can’t afford a conventional loan and to provide insurance to mortgage lenders. It also helped in reducing the risk of loss in case a borrower defaulted on the payments.

Learning about the Benefits of FHA Loans

This loan is very easy to obtain because the down payment is low and people with low credit scores can also apply. It is basically the perfect solution for people who can’t afford a 20% down payment and can’t afford private mortgage insurance. Another reason why you should consider this loan is that it is considered as assumable; this means that if you wish to sell the house off, the loan can be assumed by the buyer. This is even suitable for individuals who have suffered from bankruptcy.

You Need Mortgage Insurance

Just like all good things have a catch, this one has a catch as well. The loan requires two kinds of MIP. The first one can be paid in full upfront or it can be financed in a mortgage, whereas the second one is the monthly payment. Your house also needs to meet the conditions that are set by the FHA. Let’s have a look at the mortgage insurance premiums

Upfront Mortgage Insurance Premium (UFMIP)

When it comes to the Upfront Mortgage Insurance Premium (UFMIP) you will have to pay a premium of 1.75% of the home loan, which is independent of the credit score that you have. You can pay this amount upfront at closing as settlement charges.

Annual MIP (charged monthly)

It may be known as the annual MIP but it is a monthly charge that is a part of the mortgage payment. The amount of MIP is basically a part of the loan amount and is dependent on the following things:

  • Borrower’s loan-to-value (LTV) ratio
  • Length of loan
  • Loan size

Duration of the FHA Mortgage Insurance

It depends on the LTV ratio on the loan and the amortization term.

Requirements of the Loan

Here are the set requirements of the loan:

  • The borrower has to pay a down payment of 3.5%.
  • The borrower should be at least 2 years out of the bankruptcy.
  • The borrower should have a good employment history for at least the last two years.
  • The borrower should have a valid Social Security number.
  • The borrower should be a resident of the US and of the legal age.
  • The borrowers are to have a property appraisal from an appraiser that is approved by the FHA.
  • The DTI of the borrower should be less than 43%.
  • The minimum credit score should be at least 580.
  • The property has to meet the set standards at the appraisal.

FHA Loan Limits

The mortgage limits that are set by the FHA tend to vary state to state. If you want to learn about the limits in your area, click here.

How Do You Get the Loan?

In order to get your hands on the loan, you need to find reliable lenders in your area. You will have to submit a loan request and will then receive different quotes from different lenders.