FHA Loans Explained
If you are in the market for a mortgage, then you will likely have come across FHA loans but not known exactly what they are. This type of loan is a home mortgage that has been insured by the Federal Housing Administration (FHA). There are a number of benefits associated with this type of mortgage, each of which will be explored in this guide.
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What exactly is an FHA loan?
These home mortgage loans are insured by the FHA and there will usually only need to be a 3.5% down payment paid by the borrower. A borrower will usually need to have a credit score of at least 580, which makes them a good fit for those people who have some challenges with their credit score or they do not have much savings.
The likes of credit unions, banks, and online lenders will issue these types of mortgages. As there is protection in place in case the borrower defaults, the lenders will be more favorable for the borrowers when it comes to the size of the down payment and the interest rates. Standard types of FHA loans will be able to be used for purchasing or refinancing a single-family home, multi-family homes of certain sizes, certain types of manufactured homes, as well as condominiums.
There are also special types of FHA loans that you can use for renovating your current home or to build a new house. You will come across limits for how much you can borrow through FHA loans. However, these limits will vary depending on what location you are trying to buy a house in.
What does the FHA do?
The Federal Housing Administration (FHA) was started in 1965 and it is a part of the US Department of Housing and Urban Development. However, it was around for a number of decades before 1965 in a different form. It was on the back of the Great Depression that there was a huge number of people defaulting on their mortgages. Therefore, the FHA was started in order to try to stop this trend and to make it more affordable to be a homeowner.
How is an FHA loan different from a normal mortgage?
The main difference between an FHA loan and a regular type of mortgage loan is that the federal government will insure the FHA loan and they will therefore be easier to obtain. This means that people will lower credit scores can purchase a game.
There are also more favorable rules with FHA loans when it comes to monetary gifts from employers, charities, and family members. However, there are certain closing costs that might be associated with FHA loans that you won’t find with a regular type of mortgage loan.
Who can qualify for an FHA loan?
There are certain requirements that a person needs to meet in order to be eligible for an FHA loan. There are certain minimum standards set by the FHA, but the private lenders might have their own rules. Generally, you will need to have a credit score of at least 500. However, there will usually be a higher down payment that you need to make if your credit score is below 580.
If your credit score is at least 580, the down payment can often be just 3.5%. However, this can rise to 10% of the home price if you have a lower credit score. There is the option to use gift money as a way to make the down payment for the FHA loan, which is useful. In terms of the minimum required debt to income ratio, it needs to be lower than 50. There are also minimum requirements that the home you are looking to purchase has to meet.
The FHA will need an appraisal that is outside of the regular home inspection. The FHA needs to be confident that this will be a good investment for the borrower. Finally, there will be FHA mortgage insurance that is built into each loan. An upfront mortgage insurance payment has to be paid when you obtain an FHA mortgage. There will then be monthly payments necessary in some cases.
Applying for an FHA loan
All of the standard types of financial and personal documents will need to be provided when you are looking to get an FHA loan. This includes providing your social security number, proof of US citizenship, legal permanent residence, or your eligibility to work legally in the country.
There will also be bank statements required, as well as the likes of pay stubs. The lender can also automatically request other types of information, such as tax returns, employment records, and credit reports. For certain circumstances, such as people currently being students, additional information might be required when applying for an FHA loan.
Traditional lenders versus online lenders
These days, there are numerous types of institutions that will offer FHA loans to borrowers. There are traditional types of institutions, such as banks and credit unions. Usually, you will need to apply for an FHA loan in person at these institutions and need hard copies of the various types of the required information. The beauty of online lenders is that everything can be done for you remotely. This means that you do not have to physically visit a branch in order to apply for an FHA loan.
You can also compare the rates between the different lenders in a much easier and transparent fashion when comparing online lenders. This is a process that can be done in no time at all, meaning that you will often be able to access the most competitive rates rather than only having a couple of traditional options to choose between. This is why more and more people are now applying for FHA loans through online lenders that have built up a good reputation over the years.
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Manual underwriting available to evaluate credit
Not available in Hawaii or New York
Low down payments required of around 3%
