How to apply for Federal Housing Administration (FHA) Loan and requirements

Are you planning on buying your dream home and you don’t have the full payment for it?  If yes you can embrace Federal Housing Administration (FHA).

The mortgage loan allows borrowers to finance homes with down payments as low as 3.5% while  conventional loans usually require a 20% down payment and are especially popular with first-time home buyers. This type of credit is a government-backed mortgage loan that can allow a borrower to buy a home .

This is a good option for first-time homebuyers who may not have saved enough for a large down payment. Even borrowers who have suffered from bankruptcy or foreclosures may qualify for an FHA-backed mortgage.

However, You may qualify for an FHA loan if you have debt or a lower credit score. You might even be able to get an FHA loan with a bankruptcy or other financial issue on your record. New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program.

New borrowers with less than a 580 FICO score will be required to put down at least 10%. This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.”

Many participating FHA lenders require a FICO score of at least 620 in order to qualify for an FHA home loan. Just because the FHA minimum is 580 does not mean a particular bank is willing to issue credit to those with that score–the FHA loan program is a voluntary one, lenders are not required to participate, and the FHA cannot force the bank to lower its FICO requirements.

This article is designed to answer FHA Loan Requirements,Credit Score, benefits and Types of Federal Housing Administration (FHA) Loans

Read: Citibank Mortgage loan review: Buying a Home

 

What Is An FHA Loan?

FHA is the largest insurer of residential mortgages in the world. FHA loan requirements and guidelines cover things like mortgage insurance, lending limits, debt to income ratios, credit issues, and closing costs.

The FHA loan is designed to help low- to moderate-income families attain homeownership. They are particularly popular with first-time homebuyers. They  provide mortgage insurance on loans made by FHA-approved lenders.

The FHA doesn’t actually lend anyone money for a mortgage. The loan is issued by a bank or other financial institution that is approved by the FHA.

The FHA guarantees the loan. That makes it easier to get bank approval since the bank isn’t bearing the default risk. Some people refer to it as an FHA-insured loan for that reason

FHA insures these loans on single family and multi-family homes in the United States and its territories. It is the largest insurer of residential mortgages in the world, insuring tens of millions of properties since 1934 when it was created.

 

FHA Loan credit score Requirements

To qualify for FHA, or Federal Housing Administration, you must have the following scores.

1. FICO score at least 580 = 3.5% down payment.
2. FICO score between 500 and 579 = 10% down payment.
3. MIP (Mortgage Insurance Premium ) is required.
4. Debt-to-Income Ratio < 43%.
5. The home must be the borrower’s primary residence.
6. Borrowers must have steady income and proof of employment.

You will require a down payment of 3.5% if you have a credit score of at least 580, you can borrow up to 96.5% of the value of a home with an FHA loan. but if your credit score falls between 500 and 579, you can still get an FHA loan as long as you can make a 10% down payment.

Be reminded that FHA credit requirements cover more than just your FICO score; they also determine eligibility based on a borrower’s payment history, bankruptcies, foreclosures, and extenuating circumstances that keep applicants from making timely payments.

 

What is FICO® score

FICO® score is a number that represents a potential borrower’s creditworthiness. FICO® is a data analytics company which uses consumer credit files collected from different credit bureaus to compute their scores.

This will be  reviewed by lenders and is used to determine how likely you are to make timely payments on your mortgage. The higher the score, the better your chances are of getting a lower interest rate on your mortgage.

 

Benefits of FHA Loan

1.Competitive Interest Rates

FHA loans offer low interest rates to help homeowners afford their monthly housing payments. This is a great benefit when compared to the negative features of subprime mortgages.

2.Determining Credit History

There are many ways a lender can assess your credit history, and it includes more than just looking at your credit card activity.

3.Easier to Qualify

FHA provides mortgage programs with lower requirements. This makes it easier for most borrowers to qualify, even those with questionable credit history and low credit scores.

4.Bankruptcy / Foreclosure

Having a bankruptcy or foreclosure in the past few years doesn’t mean you can’t qualify for an FHA loan. Re-establishing good credit and a solid payment history can help satisfy FHA requirements.

Also read: Types of Mortgage Loans you need to understand

 

FHA Loan Limits

LOW COST AREA FHA Loan Limits

Single $420,680
Duplex  $538,650
Tri-plex $651,050
Four-plex $809,150

HIGH COST AREA FHA Loan Limits

Single -$970,800
Duplex -$1,243,050
Tri-plex -$1,502,475
Four-plex-$1,867,275

 

Types Of FHA Home Loans

1.  203(k) Mortgage Program

This a  mortgage that includes extra funds to cover the cost of repairs, renovations, and home improvements

2.Home Equity Conversion Mortgage

This is a reverse mortgage that allows homeowners ages 62+ to exchange home equity for cash.

3.Energy Efficient Mortgage Program

This is a mortgage that includes extra funds to pay for energy-efficient home improvements.

4. Section 245(a) Loan

It’s a Growing Equity Mortgage (GEM) that is  scheduled to increase in monthly principal payments to shorten the loan term.

5.FHA Streamline

FHA Streamline allows those with existing FHA loans to do a rate/term refinance with a few special benefits. To begin with, you may be able to refinance into a lower rate even if you owe more on your home than it’s worth.

 

FHA Down Payments

If your credit score is between 500 and 579, you may be able to secure an FHA loan, assuming you can afford a down payment of 10%. Meanwhile, if your credit score is 580 or higher, you can get an FHA loan with a down payment of as little as 3.5%

But the down payment required by banks varies between 3% and 20%, depending on how eager they are to lend money at the time you apply.

 

FHA Loan Terms

The FHA Loan Term ranges from 15 or 30 years

 

Factors that may affect your FHA Loan

Your FHA lender will review your past credit performance while underwriting your loan. A good track record of timely payments will likely make you eligible for an FHA loan. The following list may negatively affect your loan eligibility:

1,Late Payments

It’s best to turn in your FHA loan application when you have a solid 12 months of on-time payments for all financial obligations.

2.No Credit History

If you don’t have an established credit history or don’t use traditional credit, your lender must obtain a non-traditional merged credit report or develop a credit history from other means.

3.Bankruptcy

Bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage. For Chapter 7 bankruptcy, at least two years must have elapsed and the borrower has either re-established good credit or chosen not to incur new credit obligations.

4. Collections, Judgements, and Federal Debt

In general, FHA loan rules require the lender to determine that judgments are resolved or paid off prior to or at closing

5.Foreclosure

Past foreclosures are not necessarily a roadblock to a new FHA home loan, but it depends on the circumstances

 

FHA Loan checklist

You may required by your lender, the seller, and even the title company the information to be provided, and the disclosures to be signed before the title is conveyed to you.

1. Identification
All parties at the closing should have valid ID.

2.Title Insurance Policy
You must pay for title insurance that guarantees the property is free of previous claims or liens.

3.Homeowner’s Insurance Policy
Before you can close on the property, you need to secure homeowner’s insurance, which insures the property in the case of damage.

4. Closing Funds
You must bring all funds agreed upon, in the form of a cashier’s check or via electronic wire.

 

How to  Apply for an FHA Loan?

You can apply for an FHA loan directly with the bank or other lender that you choose. Most banks and mortgage lenders are approved for FHA loans.

You can apply for pre-approval of an FHA loan with the lender you choose. The lender will gather enough financial information to issue (or deny) a pre-approval within a day or so. That will give you an idea of how much you can borrow while not committing yourself to anything.

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