When it comes to financing a new home, there are many financing options available to buyers. One of the more popular options is the FHA loan. FHA doesn’t make loans, brokers such as Federal Home Loan Centers loan the money and FHA insures loans that are made by private lenders.
→ What Is An FHA Loan?
→ What Are The Benefits Of An FHA Loan?
→ Are There Income Limits For An FHA Loan?
→ What Do I Need To Qualify?
→ Credit Scores For An FHA Loan
→ Can An FHA Loan Be Used For A Fixer-Upper?
→ What Is The Downside For An FHA 203k Loan?
→ What Other Types Of FHA Loans Are There?
→ What Do I Need To Get The Process Started?
→ Tips To Get Your Loan Approved
→ How To Begin
What Is An FHA Loan?
FHA, or the Federal Housing Administration, provides mortgage insurance on loans made by FHA approved lenders. This insures the lending institution against the loss of the loan’s principal amount in cases where the borrower defaults on the loan or fails to meet the conditions or terms of the loan.
What Are The Benefits Of An FHA Loan?
The biggest benefit of having an FHA loan is that borrowers can usually purchase a home with a smaller down payment than what is required by most conventional loan programs. FHA loans also make it a little easier for people to qualify for a mortgage when compared to a conventional loan. They allow people to buy a home with a down payment as small as 3.5%, compared to the usual 20% to 30% down required by conventional loans. This makes home ownership more available and more affordable for low to moderate income families. Plus, FHA doesn’t allow a lender to charge for unnecessary fees.
In addition to the lower down payment requirement, FHA loans have other benefits, too. For example, it’s easier to use gifts from friends or family to cover down payment and closing costs, and there’s no prepayment penalty. This is a giant advantage for subprime borrowers. If you do qualify for an FHA loan, it may be assumable, and the FHA offers some leniency during tough financial times.
Are There Income Limits For An FHA Loan?
With FHA loans, there are no income limits that are usually in place with most first-time buyer programs. But there are limits on how much a person is able to borrow. As a general rule, you’re limited to loan amounts relative to the home prices in your specific area.
What Do I Need To Qualify?
Basically, in order to qualify for an FHA loan, you’ll have to have a reasonable debt to income ratio, access to the downpayment funds, and an acceptable credit and income history. This means your income must be above your debt including the potential mortgage.
There are many, many good reasons to consider applying for an FHA loan, and several reasons why it may not be for you. The smartest way to go about applying for your FHA loan is to use a Federal Home Loan Centers Loan Officer. Our knowledgeable professionals can help walk you through the entire loan process from start to finish, providing information and guidance every step of the way.
Credit Scores For An FHA Loan
Fortunately, you don’t have to have outstanding credit scores to get an FHA loan, but it does need to be decent. Currently the minimum middle FICO score you will need to be approved for a Federal Home Loan Centers FHA loan is 580. While you can have one score lower, you will need 2 credit scores at or above 580.
Can An FHA Loan Be Used For A Fixer-Upper?
Another plus for an FHA loan is that they offer funding tor home improvements through the FHA 203k program. A 203k loan lets you borrow money for home ownership and home improvements in one loan. It is guaranteed by the FHA, which can help to keep your interest rates low (as compared to using a credit card or line of credit to pay for the repairs).
So is a 203k loan for you? It does offer competitive rates, and you can often buy a home that traditional lenders might not provide funding for. As with other FHA loans, the maximum on the loan depends on the location of the property. As a general rule, you can use the 203k loan to borrow up to 110% of the home’s projected value after improvements are made. And by having only one loan for both the home and the improvements, you’ll have a lot less paperwork to complete!
The biggest draw for a 203k loan is that you’re able to make the home improvements you want to make. Say you want to update a kitchen and bath or add on a new room on the home you’re planning to buy – everything is taken care of IN ADVANCE. And you’re even allowed to set aside some money to cover your housing while the repairs are being completed.
There are limits, of course. The home improvements must cost $5000 at a minimum. And, if you’re project will cost under $35,000, the FHA offers a “streamlined 203k loan, which makes the process a lot easier. But remember: if you make a mistake and underestimate your costs, you’re going to be out of luck. You can’t increase the loan amount once it’s finalized.
What Is The Downside For An FHA 203k Loan?
So what’s the downside? Well, for one – the loan takes longer to close than a traditional loan. This might not be a big problem for you, but it may be a problem for sellers. And because of the home improvement aspect of the loan, you’re probably going to have to jump through a lot more hoops to get it approved. Closing could take from 45 to 90 days.
Finally, the home improvement work must be completed within 6 months of closing, so make sure you’re using a reputable contractor who is able to deliver what they promise.
What Other Types Of FHA Loans Are There?
We’ve talked a lot about the 203k loan, but the most widely used FHA loan is the 203b Fixed Rate Mortgage. This loan keeps your down payment to a minimum, and could help to reduce your closing costs. With the 203b, you can finance up to 97.5% of your loan. There are some qualifications to get this loan, including a specific debt-to-income ratio, but there is no minimum income requirement.
What Do I Need To Get The Process Started?
Speaking of process, you’ll need to be prepared to have the necessary documentation ready in order to apply or pre-qualify for your FHA loan. This includes two months of bank statements, pay stubs and W2’s, and in some cases you’ll need copies of your actual tax returns. Once all of the paperwork is together, you’re ready to start the application process.
To apply click here.
We can also help you pre-qualify for your FHA loan. The FHA looks for “reliability” when pre-approving loan applicants. This means they would like to see that you’ve held a steady job for at least two years (this can be with different employers), and that you increased – or at the very least maintained – a consistent income. If you can demonstrate that you’ve been a good credit risk for two years or more, your chances of pre-qualifying are much better.
Tips To Get Your Loan Approved
If you’re getting ready to apply for an FHA insured loan – here’s a tip: avoid the biggest mistake that potential homebuyers make, and that is making a major credit purchase. It affects your debt-to-income ratio, because the calculation is made based on your current debts and the percentage of your debt with respect to your income. A major credit purchase will distort that ratio, to the point that it may impact your loan approval. In fact, you should eliminate as much debt as possible prior to applying for your FHA insured loan!
Pay off as many credit card bills as you can, because by eliminating debt you’ll be helping you when you apply. If you have multiple credit cards, try to pay off one and close the account, because it can improve your credit rating by showing that you have less potential debt waiting to happen. And check your credit report – if there are any erroneous items that show up, resolve these items BEFORE you apply, because they will impact your credit score if you don’t.
How To Begin
More and more people are applying for an FHA loan, and with good reason! With only a 3.5% down payment and higher single-family home mortgage limits than conventional loan products means more people can have a chance to own a home. But navigating the loan process can be intimidating and frustrating as well. That’s why your best bet is to let a loan agent at Federal Home Loan Centers assist you with your loan. We have worked successfully for many clients, and we’d like to do the same for you. Our knowledge and experience can guide you and minimize the time it would take doing it on your own. We’re ready to help!
Ok, this is really a lot of information to digest! And whether you’re planning on a regular FHA loan or a 203k, remember that we are here to help you. You’ll be working with a Federal Home Loan Centers Government Mortgage Sepcialist. We understand the requirements, the process and the paperwork, and can help streamline the overall process by helping you complete the documentation needed to obtain your FHA loan.