If you're a first-time home buyer needing a loan, you might want to look at an FHA home loan. This is a loan insured by the Federal Housing Authority (FHA), and they're quite popular among home buyers due to their less rigid borrowing requirements.
The FHA loan program was a response to the rash of foreclosures and defaults that took place in the 1930’s. It provides adequate insurance to mortgage lenders. Also, this program helped ignite the housing market by providing loans that were accessible and affordable for people who did not have stellar credit, or cash for a large down payment. Today, it is the largest insurer of residential mortgages in the world.
If you're saving for a house, you might benefit from an FHA home loan. Once you know more about the basics of FHA home loans, you should have a better idea of whether or not it is right for you.
Why Are FHA Home Loans So Appealing?
While FHA home loans are not perfect, they can be a big help to potential home buyers who don’t have a lot of savings, a high income or a good credit score. This can especially be a help for first-time homebuyers.
However, there’s a catch—if you take out an FHA home loan, you have to pay FHA mortgage insurance. This insurance makes sure the lender won’t lose money if you have to default on the loan.
This loan will be an upfront 1.75% of the loan amount due when the borrower receives the loan, plus an annual premium that ranges from 0.45% to 1.05% of the loan. The annual premium, though, will be divided by 12 and paid in monthly installments.
How do you get an FHA Home Loan?
Before you can get an FHA home loan, you’ll need to meet some basic requirements. The good news is they're pretty easy requirements to meet. Any FHA home loan applicant must:
- Have a valid social security number
- Have lawful residency in the United States
- Be of legal age to sign for the mortgage
These basic requirements apply to you and any co-applicants that may be listed on the loan application.
Once those basic requirements have been fulfilled, you’ll have to meet the following guidelines to qualify:
- You must pay 3.5% of the mortgage loan upfront and have a 580 credit score OR pay 10% of the loan upfront and have a credit score between 500-579, although some financial institutions may require a higher credit score.
- You must have been employed for the past two years and verify that employment history through pay stubs, bank statements or federal tax returns.
- The mortgage loan must be used for a primary residence.
- The property must meet HUD property guidelines and be appraised by an FHA-approved appraiser.
- Your front-end debt ratio (i.e. monthly mortgage payments) must not exceed 31% of your gross monthly income, although lenders may allow ratios up to 40% in some cases.
- Your back-end debt ratio (i.e. your mortgage plus all your monthly debt payments) must not exceed 43% of your gross monthly income, although lenders may allow a ratio up to 50% in some cases.
In addition, if you experienced a bankruptcy, you have to wait anywhere from 12 to 24 months to apply. If you’ve had a foreclosure, you must wait three years to apply. However, lenders may make an exception for you if you have extenuating circumstances.
You should also know that there is no maximum or minimum income limit. Your income will definitely play a role in whether you get approved or not, but it is not the deciding factor.
Buy the Home of Your Dreams With First Alliance Credit Union
Even with an FHA home loan, buying a home can be a pretty daunting prospect. If you need help, don’t worry—you can always contact a First Alliance Credit Union loan advisor today who will help you figure out what kind of loan you can get and help you get the best possible interest rate on your mortgage.