Understanding FHA Loans
First time home buyers often have challenges securing an affordable loan. Thankfully there’s a loan that helps low income buyers even if their credit is not so great: it’s called an FHA loan. An FHA loan is a mortgage backed by the Federal Housing Administration (or FHA). These loans are ideal for first-time homebuyers because the eligibility requirements are more lenient than other loans, and thus easier to get approved. Why are lenders more lenient? Because the FHA guarantees the loan, so there is less risk for lenders and banks. Let’s take a closer look at how this works.
Think of the FHA as an insurance fund, not a lender. With an FHA loan, lenders are insured when a homeowner fails to make a mortgage payment. In other words, the FHA doesn’t write you a check for the loan amount at the time of purchase (an FHA-approved lender does)—instead, they reimburse the bank in the event that you default on your loan. It’s because of this guaranteed insurance that lenders are more forgiving when it comes to lending FHA loans.
Benefits of an FHA Loan
Aside from attractive interest rates and lenient eligibility requirements, FHA loans offer many other benefits, including:
Minimal Credit Requirements
To qualify for an FHA loan, applicants must have a minimum credit score of 500, although lenders require a higher score in order to be approved. Still, approval is based on lender discretion, so there’s no guarantee that you’ll be approved even if you meet the minimum credit requirement.
If you don’t have credit history you may still be eligible for an FHA loan so long as your payment history shows that you pay your bills on time (e.g. rent or utility bill). Similarly, a foreclosure, short sale, or bankruptcy in the past will not necessarily mean you won’t qualify for an FHA loan, but lenders may require you to fulfill a waiting period as well as provide written documentation that demonstrates how you have improved your financial management skills.
Low Down Payment Option
The down payment requirement for an FHA loan is currently 3.5% of the total purchase price of the home, which is significantly lower than most conventional loans. You can make a down payment using a personal savings fund, a gift from a relative or immediate family member, or grant money from an assistance program.
Seller, Builder, or Lender Pays Closing Costs
As a buyer, you may not be responsible for covering all of the closing costs such as the appraisal, title transfer, or credit report. This is especially helpful for first-time buyers who want to save money for future repairs or remodeling. Sometimes a seller or homebuilder will offer to pay closing costs as an incentive for the prospective buyer to purchase the home. Other times the lender pays for the closing costs, but this may result in a higher interest rate.
Various FHA Loan Types
There are some FHA loan options that extend unique privileges to homebuyers. For example, if you need to make a non-structural repair (e.g. painting or replacing doors), the FHA 203(k) loan allows you to finance the expected appreciated value that a repair creates instead of the existing appraised value.
Additionally, lenders may also extend special assistance for an FHA borrower who experiences financial hardship. This relief may be a renegotiation for a lower interest rate, a temporary cancellation of payments, or a portion of the loan amount may be eliminated without interest.
How do I apply for an FHA Loan?
If you’re considering an FHA loan for your home financing needs, here are some of the most important requirements:
- Valid social security number and proof of U.S. citizenship
- Sufficient credit score
- Stable income and employment
- Outstanding debt does not exceed 50% of your gross income
- No history of judgments or delinquency on federal taxes or student loans
At Continental Mortgage, we want to turn your dream of buying a home into reality. Contact us today to get started!