FHA Loans: What You Need To Know
In this day and age, few Americans can say they have enough cash on them to purchase a home, and even fewer can say they trust any business entity with loans towards making their dream of having a home a reality. Almost on a daily basis do we hear another story of a citizen getting reduced to nothing (financially at least) by outstanding debts incurred by loans with lucrative interest rates. Fortunately FHA loans and their FHA mortgage benefits are there to help out the hard working men and women of this great country.
What is an FHA loan?
FHA mortgage loans are covered by the Federal Government. This loan program is managed by HUD, Department of Housing and Urban Development and Federal Housing Administration. The FHA or Federal Housing Administration assures lenders against any financial damage caused by borrower. This is the major difference between regular home loans and FHA.
One more difference is down payments as borrowers of FHA program can get the down payment to as little as 3.5 percent, while purchasing the house.
Today, a number of banks and lenders offering home loans also provide FHA. These loan programs are popular mainly due to the smaller down payments and credit requirements.
Earlier it was believed that FHA loans are very easy to get in comparison to regular loans. This is true to some extent. With the government support, lenders provide some relief when it comes to credentials and qualifications of the borrowers.
Required Credit Score For an FHA loan
The credit score requirements for FHA loans depends on which FHA mortgage product you’re looking at and which FHA lenders you’re dealing with. Usually, to get the absolute best financing and to even get approved on a typical new home purchase, the buyer should have a credit score of 580 and higher. Buyers with credit scores between 500 and 579 are, according to the current FHA mortgage guidelines, “limited to 90 percent LTV” however it is rare that a lender can or will approve with a credit score under a 580.
Applicants who have a minimum decision credit score of less than 500 are not eligible for an FHA loan. Technically those with credit scores of 500 or better are eligible for FHA loans with 100% financing with no down payment required when using the FHA 203(h), Mortgage Insurance for Disaster Victims. FHA Streamline Refinance is another great option.
Current FHA Home Loan Requirements
At present the rules and regulations of FHA are same as they were a few months ago. The current rules and regulations are as following.
- In order to qualify for the down payment of 3.5 percent, borrowers need to have minimum credit score of 580.
- The total debt of a borrower needs to be not more than 43 percent of his monthly pay.
- Department of Housing and Urban Development allows loan applicant to get more debt to income proportion if a lender has some important compensating factors such as great credit score, important cash reserves and on time mortgage payments. Readers can get full information in HUD Handbook 4155.1, Chapter 4, Section F.
- Borrowers, who have a credit score less than 620 and their DTI or debt-to-income ratio is 43 percent, can face more inquiries while applying for the loan. In this case borrowers can be asked to go through manual underwriting describing the compensating factors to frame the low-score or high-debt condition.
- Those who have a credit score ranging from 500 to 579 needs to set aside at least a 10 percent down payment in case their application is approved.
- Lenders can apply their individual guiding principle on top of strategies applied by HUD. This process is recognized as overlay. As a result, the loan application of a borrower can be rejected even f the credit score is according to the plan of HUD’s least cutoff.
FHA Mortgage Insurance
If the FHA loan is what you ultimately decide on then you will be required to obtain mortgage insurance. Initially that means paying a one-time mortgage insurance premium typically equal to 1.75% at closing.
FHA loans also require that you carry insurance for the life of the loan. Most of the time that’s in the form of an annual premium that gets rolled into your monthly mortgage payment. Most FHA home buyers should expect to pay an annual premium of roughly 0.85%.
A great benefit to the FHA loan is that you can pay the mortgage insurance premium upfront at closing or you can elect to have it added to the borrowed amount and so then your lender would pay it on your behalf. If you decide on the latter though, your interest rate will be slightly higher over the life of the loan. Your annual premium is going to be based on the amount of the loan, the LTV ratio and the amortization period of the loan.
How To Find an FHA Lender and Apply for an FHA Loan
Nowadays most lenders will process an FHA-backed loan. Some can elect to add their own criteria in addition to the above FHA requirements. Because of this it’s important to talk to your lender and find out their specific criteria and guidelines for an FHA home loan.
You can start here by comparing FHA approved lenders’ interest rates