17 Jan 2017
January 17, 2017

FHA Loans for Beginners

Federal Housing Administration loans are popular choices for first-time home buyers. Given the stringent requirements to qualify for a conventional mortgage, many borrowers opt for the ease of applying for an FHA loan.

Credit

Borrowers don’t have to meet the high credit standards set by traditional lending institutions. If you have had a previous bankruptcy, you may be eligible for an FHA loan two years after the discharge date. If you have had past issues with collections or late payments, some circumstances may be overlooked. To take advantage of the minimum down payment, you must have a credit score of 580. If your credit score is between 500 and 570, you will be required to provide a larger down payment.

Down Payment

Unlike conventional loans, FHA loans require less cash at closing. If your credit score is 580 or above, you will be able to provide a 3.5 percent down payment. For a slightly lower credit score, a 10 percent down payment will be required. Some of these funds can be offered as a gift from a family member. If your purchase agreement includes seller concessions, up to six percent of closing costs can be applied toward the down payment.

Rates

FHA loans have competitive rates. This means you will pay a lower monthly payment, which translates to less money over the life of the loan. In many cases, federally backed loans are more competitive than traditional 30-year, fixed-rate loans.

Mortgage Insurance

Since the requirements for an FHA loan are not as high as those of a conventional mortgage, you must pay for mortgage insurance. At the closing, you will be required to pay for upfront mortgage insurance, which amounts to 1.75 percent of the cost of the loan. With your monthly payments, you will be required to pay for annual mortgage insurance. The amount is based on the cost of your loan, the term of the mortgage and the loan to value ratio.

Debt to Income Ratio

FHA loans allow for a high debt to income ratio. If you have student loans, a car loan and other debts, you may still qualify. In some cases, the FHA will allow a 50 percent debt-to-income ratio.

Additional Requirements

To qualify for an FHA loan, you must be a lawful resident of the United States, have a valid social security number and be steadily employed. An appraisal must be conducted by an FHA-approved appraiser. The condition of the property must meet requirements that have been defined by the Federal Housing Administration.

For more details on FHA loans, contact a FHA-approved lender. This qualified professional will help you determine which loan product is ideal for your specific needs.