What are FHA loans?
FHA loans might be a sigh of relief for those with a bad credit history. Although they are similar to mortgages that have conventionally been issued by credit unions and banks, what makes them stand apart is the fact that they are insured by the Federal Housing Administration.
It is because of this very reason that lenders are now more readily approving loan requests from those who have a low FICO store or those who have insufficient resources to make a down payment. The fear that borrowers might not be able to pay back has been eliminated by the fact that lenders will have their money returned via insurance even if the debtor defaults.
Who is eligible for an FHA loan?
First time home buyers, those not having enough resources for a down payment, or those with a low credit score are eligible for receiving an FHA loan, given that they meet other requirements set by the Federal Housing Administration.
What are the limits on an FHA loan?
An applicant may be able to attain an FHA loan in the range of $356,362-$822,375, depending on his/her area of residence.
Pros and cons of an FHA loan
One of the positive aspects of FHA loans is that they allow those individuals to acquire a mortgage who are usually denied this facility because of their financial condition or credit history. Applicants with a FICO score of 580 or more might even be allowed an extremely low down payment equivalent to 3.5% of the loan amount. Considering that the down payment demanded by conventional loans is 20%, this is remarkably less.
The drawback, however, is that although FHA loans involve a lesser down payment, they require the borrowers to pay insurance for the complete duration of the mortgage. This contrasts with conventional loans where borrowers are not required to pay insurance once the loan-to-value threshold is exceeded.
Basic requirements to qualify for an FHA loan
To be eligible for an FHA loan, applicants must have a FICO credit score of at least 500. However, those with a score less than 580 would be required to pay a comparatively higher amount as a down payment.
Applicants who have a credit score of at least 580 would be able to acquire the loan if they agree to make a down payment of 3.5%. However, for those with credit scores ranging between 500 and 580, a down payment of 10% would be required.
Individuals who have a debt-to-income ratio of less than 50% are preferred by FHA lenders.
There are multiple categories of FHA loans. Some, like construction or renovation mortgages, may require a detailed assessment of the property before and after the changes/improvements.
Mortgage insurance is an integral part of FHA loans. Those making a down payment of 10% or more would be required to pay insurance for 11 years, starting from the beginning of their loan period, whereas those whose down payment is less than 10% would be required to pay for insurance throughout their loan.
Applying for an FHA loan
Only US citizens are eligible for FHA loans. Therefore, proof of the applicant’s citizenship would be required in the form of a passport, driver’s license, or any other ID document issued by the government. Additionally, having a valid Social Security number is a must. The debtor is also required to provide proof of income in the form of a salary slip or bank statement.
In case the money is given by one of their family members, a note stating the same would be required. It is very important to meet all the paperwork requirements if one wishes to qualify for an FHA loan.