One of the most popular government-backed home loans in the country, FHA was designed for those who have lower than average credit scores and requires a low down payment for qualified applicants.
How Do I Qualify for an FHA Loan
If you have a credit score of 580 or higher, you can qualify for 3.5% down FHA loan. If you have a credit score of between 500 and 579, you can qualify for a 10% down payment. Guidelines and policies will vary by the lender.
That means with a good credit score you can borrow up to 96.5% of the value of a home with this federally backed home loan program. Plus, your down payment can come from a financial gift from a family member, your savings account, or a grant for down payment assistance.
Your lender will look not only at your credit report, but also your work history for the past two years. Other forms of payment such as utility and rent will also be examined.
If you have experienced a bankruptcy, you must wait at least two years before you can apply for an FHA loan. As long as you have re-established good credit, you are then eligible to apply for the loan.
If you are self-employed, you, too, must have two years of successful self-employment history. This will be documented through a profit and loss statement, a current year-to-date balance sheet, and tax returns.
You must have a valid Social Security number, be a lawful resident of the US, and be of legal age according to your state to purchase a home. FHA was not designed for investors. It was meant for principal homeowners.
Because of FHA’s many benefits, the program is popular with first-time home buyers.
Why Do I Have to Pay Mortgage Insurance Premiums?
Because the FHA loan program offers a low down payment, the program requires that the applicant pay a mortgage insurance premium. There are two kinds of MIP.
The first is an upfront fee and the second is an annual which, contrary to its name, is charged monthly. Generally speaking, the upfront MIP is equal to 1.75% of the base loan amount.
This can be paid at the time of closing, or it can be rolled into the loan amount. The monthly MIP ranges between 0.45%-1.05% of the base loan amount.
This insurance protects your lender against the possible loss from mortgage default.
You’ll make monthly MIP payments for either the first 11 years of the loan or for the life of the loan, depending on your loan-to-value and the length of the loan.
What are the Limitations of an FHA Loan?
The FHA loan program has outside limits on how much you can borrow. These limits are based by the region in which you live. Areas that have a lower cost of living have lower limits.
Conversely, higher cost regions have a higher figure. Additionally, there are also “special exception” regions. These areas include Alaska, Guam, Hawaii, and the US Virgin Islands.
Except for these areas, the FHA limit is set at 115% of the median home price for a county. However, due to very high construction costs, the FHA limits are even higher in the aforementioned areas.
Is an FHA Loan Right for You?
FHA is a great loan program, but it isn’t right for everyone. Those with credit scores below 500 or those with bad credit will want to reconsider this program. Created to support low and moderate income homebuyers, the FHA loan program can be the key to getting you into your first home.
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