With buyer-friendly qualifications, lower down payments and reduced interest rates, it’s no wonder FHA loans are one of the most popular types of mortgages. FHA loans can sometimes open doors for first-time homeowners and those with lower credit scores. The Federal Housing Administration, a government agency, insures mortgages, which helps reduce the risk of loss for lenders. If you’re in the market to buy a home, learn more about FHA loans to find out if one is right for you.
The Federal Housing Authority sets some basic requirements to qualify for an FHA home loan. You must have a valid Social Security number and be a U.S. resident. You must also have been working for the same employer for the past two years. Other requirements include being old enough to sign a mortgage in your state, as well as some other qualifications that are state-specific. These loans are only available for primary residences, and you’ll need a minimum down payment of at least 3.5 percent.
Ease of Qualifying
Buying your first home can be financially daunting, especially if you’re young and haven’t had a lot of time to save up for a significant down payment. An FHA loan helps ease the process because the mortgage is insured, making it a useful tool when purchasing a starter home. Residents in disadvantaged neighborhoods or those whose credit scores are less than perfect can also have an easier time getting approved for an FHA loan than for a traditional mortgage.
Low Down Payments
FHA loans typically require smaller down payments than conventional loans. Your credit score will determine exactly how much you’ll need. VantageScores range from 300 to 850. A higher number indicates less risk for the lender. If your credit score is 580 or higher, a down payment of only 3.5 percent is required for an FHA home loan. A down payment of at least 10 percent is necessary if your credit score falls between 500 and 579.
All hope may not be lost if your credit score is below 500 — consult with a FHA loan specialist to see if you qualify for any special circumstances or allowances. For example, a family member may apply to be a non-occupant co-borrower or co-signer, which can help to reduce the risk of the loan if your credit is less than adequate. Any family member with a responsible credit history can apply, including a spouse, parent, child, sibling, aunt, uncle, niece, nephew and stepchild.
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FHA Approved Lenders
The Federal Housing Authority does not provide the actual loans. It simply insures the funds. You must obtain the mortgage from an FHA-approved lender. There is no uniformity between these lenders, so aspects like interest rates, costs and services can vary. Although interest rates for FHA loans are usually lower than for traditional mortgages, it’s still best to shop around to make sure you’re receiving the best value.
Low or No Closing Costs
Closing costs such as appraisal fees, inspections, credit reports and broker commissions can really add up, but these costs are usually lower with an FHA loan. The costs may even be covered by the selling party, such as the builder, as an incentive to buy. Consult with your lender to determine what closing costs you may be responsible for.
FHA loans include two separate insurance premiums. The upfront premium, which is paid when you get the loan, is 1.75 percent of the total loan amount. The second premium is the annual premium and this amount is based on the size of the loan, its length and the initial loan-to-value ratio (LTV Ratio). The LTV Ratio is a comparison between the value of the loan and the value of the home. A lower LTV Ratio equates to less risk for the lender and therefore, lower interest rates. The annual premium is paid monthly.
Cash for Repairs
An FHA loan can also provide financial assistance for home repairs. This special loan product offered by the FHA is called a 203(k). The amount of the loan is usually based on the projected value of the home after the repairs are made. Financing options are available for structural and nonstructural repairs. The foundation, roof or walls of the house are examples of structural repairs whereas nonstructural repairs usually refer to the interior of the home, such as new carpeting, updating the kitchen or replacing the bathroom sink.
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