What is an FHA Loan?
In the 1930s, the FHA (Federal Housing Administration) responded to the upswing in housing foreclosures and defaults by providing lenders with an insurance plan to accelerate housing purchases by making mortgages more affordable for home buyers. Still widely used today, FHA loans give lower-income or credit-risk buyers a better opportunity to own a home.
What is an FHA Loan?
FHA loans are federally-insured mortgages, meaning the government assumes part of the risk if the borrower defaults when a housing lender issues a home loan. FHA loans are also very popular with first-time home buyers because they will have lower down payments and less rigorous lending standards.
Because FHA loans can be issued to borrowers with lower credit scores, they require the borrower to buy mortgage insurance to protect the lender from a possible default. FHA loans require a down payment of only 3.5% compared to the standard 20%, and the loan is assumable so that a new buyer can take over the payments if the original borrower decides to sell the home.
How Does an FHA Loan Affect the Home Buying Process?
FHA loans require that the home and property meet minimum appraisal standards before approval. If the property does not meet the standards and the seller is unwilling to make the repairs, the repairs must be paid by the borrower to an escrow account at closing.
Limits on FHA loans differ by state and county. They also require two different mortgage premiums – the upfront mortgage insurance premium (MIP) payed at closing, and the annual MIP payed monthly. Both of these premiums add significant costs to the loan, but upfront payment can be moved into the monthly payments and the annual payment will depend on the length of the loan.
Who Can Get an FHA Loan?
FHA loans are typically for people with a poor credit history or with an insufficient credit history to be approved for a traditional mortgage. Candidates for FHA loans must meet these requirements.
- Have a stable work history or be employed with the same employer for 2 years.
- Have a valid SSN, legal US residence and be of lawful age to sign a mortgage.
- Be able to make a minimum down payment of 3.5%.
- Have a front-end ratio (total cost of mortgage + HOA fees + property taxes + home and mortgage insurance) which is less than 31% of total gross income, or as high as 46% if the lender can provide justification as to why it is an acceptable risk.
- Have a back-end ratio (mortgage + monthly debt) less than 43% of gross income, or as high as 56% if the lender can provide justification as to why it is an acceptable risk.
- Credit score of at least 580 for maximum financing + 3.5% down payment. Credit score of at least 500 for LTV of 90% + 10% down payment. Determined on a case-to-case basis.
- Be typically two years removed from a bankruptcy and reestablishing good credit.
- Be typically three years removed from a foreclosure and reestablishing good credit.
If you have questions about FHA loans, contact us today at Plaza Real Estate at (316) 686-7121.