Federal Housing Administration (FDA) backs up these loans, making them popular among first-time buyers. A potential home buyer needs to meet a certain level of requirements before being approved for an FHA home loan. Although the government insures FHA loans, they are readily available across the nation. Most mortgage lenders with an FHA stamp of approval offer the loan to any eligible applicant. The government designed the FHA home loan to cater to low and moderate-income borrowers who meet specific requirements. Applicants enjoy a lower minimum down payment and credit score compared to many conventional loans offered.
How FHA Loans Work
FHA home loans are designed in two, 15-and 30-year terms with fixed interest rates
. If you lack pristine credit, sufficient income, and savings, you can still become a homeowner. FHA loans have flexible underwriting standards, making it possible for applicants with low credit and minimum funds to own a home.
Even though these loans are easy to access, borrowers are still required to pay FHA mortgage insurance. The mortgage insurance protects the lender in case the borrower defaults on payments. Most home loans require insurance coverage since the borrower puts down less than 20 percent. FHA home loan borrowers must pay two insurance premiums; upfront mortgage insurance and annual mortgage insurance.
Upfront mortgage insurance premium requires the borrower to pay 1.75% of the total loan. The payment is made after the applicant receives the loan. Depending on the circumstance, this premium rolls into the financed loan. Annual mortgage insurance premiums vary from 0.45% to 1.05%, determined by the term (15-and 30- years) and the loan-to-value ratio.
Borrowers who have financed 90% and stay current with mortgage payments get their FHA mortgage insurance canceled after eleven years. However, mortgages with a loan-to-value (LTV) ratio greater than ninety percent pay insurance until the loan is paid.
Closing costs are significant, especially as you near the completion of the loan. FHA lenders charge 3-5 percent of the loan as closing costs. In addition, through FHA loans, sellers, builders, and lenders pay up to 6% of the closing price, including appraisal fees and credit reports.
How Many FHA Loan Can You Have?
Although FHA loans have lenient requirements, borrowers can only access multiple loans at a time. Since borrowers access multiple loans one at a time, it prevents them from buying investment loans with the loan. However, certain circumstances allow applicants to access an additional FHA loan. This means you do not have to pay off your current property or sell it.
Borrowers who plan on relocating to a far location beyond commuting distance to the property qualify for an additional FHA loan. Another instance is if you lived as a jointly owned property but left to buy a home, but the co-owner wishes to remain in the current property. This will also qualify you for an additional loan.
If you wish to buy another home because of an expanding family, you will need to provide evidence of increasing independents. Those who meet these exceptions qualify to have an additional FHA loan.
What are the FHA loan requirements?
If you are ready to apply for an FHA loan, it is advisable to familiarize yourself with the loan requirements. All applicants are required to pay a down payment which is determined by their credit score. For example, borrowers with a credit score above 580 can put as little as 3.5%, but a lower credit score of 500 requires a 10% down payment.
Applicants are also required to have a debt-to-income (DTI) under 43% for them to qualify for an FHA loan. However, if the loan does not pose a significant risk to the lender, you can approve a 50% DTI. The mortgage insurance is constant at 1.75% of the entire loan. The amount paid is determined by the term, loan size, and loan-to ratio (LTV).
These requirements vary from one lender to another, and it’s best to consult a loan officer to understand their FHA loan requirements.