Getting a loan for a home is the dream of a lot of Americans. Unfortunately, some people can’t qualify for a traditional home loan, which means they may need assistance. If you’re having trouble borrowing money for a home, you may want to look into the possibility of getting an FHA (Federal Housing Administration) loan.
What Is an FHA Loan?
An FHA loan is provided by an FHA approved lender through the Federal Housing Administration’s mortgage insurance division. It is a type of federal assistance generally given to low-income families or individuals through the auspices of the department of Housing and Urban Development (HUD.)
Lower Down Payment
One of the nice things about an FHA loan is that you won’t have to come up with as much money for a down payment as you would with a more traditional home loan. That makes it easier for people with lower incomes to qualify, because they won’t have to come up with as much cash. A typical home loan requires approximately 20% of the property’s worth as a down payment. With an FHA loan, you may be able to qualify for a loan with only a 3.5% down payment.
FHA loans are popular with first-time buyers, mostly because of the fact that they wouldn’t have to have a lot of money for a down payment. However, an FHA loan may be a viable option for other people. As long as you meet the criteria, you may be able to get a loan.
One Loan at a Time
You don’t need to be a first-time buyer to qualify for an FHA loan, but if you do accept FHA assistance, you won’t be able to get more than one loan at a time. That means people can’t take advantage of the low rates to purchase multiple properties, and then rent them out. If you take out an FHA loan on a property, you must reside there.
Good Credit Is Necessary
In order to qualify for an FHA loan, you will need to have a credit score in the mid 600s. A higher credit score would be better. The higher your credit rating, the lower your interest payments will be. Exactly how high your credit score needs to be in order to qualify for an FHA loan depends on the lender–some are more lenient than others. If the lender you’re talking to insists on a higher score, you will have to make an effort to improve it, or find another lender.
Different Types of FHA Loans
AN FHA loan can come in many forms. The most common type is a 30 year loan with a fixed interest rate. However, you can also get FHA loans with fixed interest rates for 10, 15, 20, or 25 years. You can also get an adjustable rate loan, but most people consider them more risky.
Private Mortgage Insurance Is Mandatory
One of the major drawbacks to an FHA loan is the fact that you’re required to carry private mortgage insurance. This is for the protection of the lender. So, until you’ve paid up to 20% of the value of the home, you will need private mortgage insurance. PMI pays the difference if something happens before your property is worth whatever you still owe on it.
In order to qualify for an FHA loan, you must maintain continual employment for two full years. Lenders prefer that your job is with the same employer over that length of time. You will also need to have received a steady or increased level of income over that period. You may not be able to qualify if you have a bankruptcy in your recent past–the bankruptcy may not matter unless it’s affected your credit rating since it was cleared up. A recent foreclosure may also affect your chances of qualifying for an FHA loan, and the home you’re trying to buy must cost less than 30% of your household income per month or you won’t qualify for an FHA loan.
Guest post from Harper Ryan. Harper writes for HomeLoans.org.