FHA (What is an FHA Loan?)

This article will cover details about an FHA home loan, including the eligibility criteria, property criteria, and whether this is the best type of loan for you.

What Is An FHA Loan?

The Federal Housing Administration (FHA), governed by the Department of Housing and Urban Development, offers the FHA Loan. Since FHA insures the loan, lenders are protected if you fail to pay back the interest or the loan.

Working on FHA Home Loans

The Federal Housing Administration offers qualified home buyers the chance to take a certain percentage of the house cost as a loan. The main criterion is the credit score of the borrower. For example,

• If the applicant has a credit score of 580 or above, they can get up to 96.5% of their property price as a loan.

• If the applicant's credit score is between 500 and 579, they may be required to make a down payment of 10%, and the rest can be borrowed from the FHA.

Note: The minimum credit scores differ for FHA-approved lenders. Also, remember that if your credit score is low, you may be required to make a down payment as well as a mortgage insurance premium. 

Benefits of FHA Loan

• Applicants enjoy the benefits of a lower credit score than many conventional loans.

• A lower down payment option as a part of an FHA loan. 

• People with a history of bankruptcy or other financial problems can also avail of FHA loans.

• Closing costs can be a part of FHA loans.

Buyer Eligibility 

These are some of the mandatory criteria that buyers need to fulfill are as follows -

• The property must be FHA-approved.

• The property gets inspected to ensure that it meets the minimum property standards.

• It must be your primary residence. It cannot be bought for investment's sake.

• The buyer has to start living in the property within 60 days of possession.

Other FHA Loan Requirements

• Down Payment 

When you buy a home on a loan, you are usually required to make a down payment, which is a percentage of the property purchase price. The down payment depends directly on the borrower's credit score. 

Per FHA loan terms, the minimum down payment is 3.5% of the property price. This applies to buyers with a credit score of 580 or more. If your credit score is still lower, between 500 and 579, a 10% down payment will be required. An online mortgage calculator helps calculate the monthly installments.

• Mortgage Insurance Premium (MIP)

Similar to conventional loans, where home buyers need to pay private mortgage insurance or PMI, an MIP must be paid on FHA loans. Mortgage insurance safeguards the lender if you fail to pay interest on your loan. The MIP has to be paid for the entire duration of the FHA loan. The only exception is in the case of buyers who have made a 10% down payment. The MIP is applicable in this case only for the first eleven years. The MIP is about 1.75% of the loan amount charged upfront as a premium. 

You will also be required to pay a yearly MIP based on the loan term, the loan-to-value ratio, the down payment size, and the total loan amount. This is usually between 0.15% and 0.75% of the total value of the loan.

• Credit Score

Maintaining your credit score is essential to get a good loan from an FHA-approved lender. Some of the things you need to take care of include your debt on credit cards, the latest credit, the type of credit you have, how much credit you have used, and whether you pay the bills on time. 

• DTI or Debt-to-Income Ratio

The higher the credit score, the better the chances of getting a higher DTI. DTI is usually expressed as a percentage and is obtained by dividing your total monthly debt payments by the gross monthly income. It is best to keep the DTI low so that you can get an FHA loan quickly. If your DTI is high, you can still get an FHA loan, provided your credit score is high. Per the FHA, the debt-to-income ratio should exceed 43% of your gross monthly income. 

• Income Requirements

Even though FHA loans are not dependent on income amounts, borrowers need to show that they have a steady source of earnings to avail of the loans. You must share the tax returns, W-2s, pay stubs, and bank statements for getting a loan. Your lender may also ask you to produce other documents.

• Loan Limits of FHA

Borrowers can receive FHA loans with a maximum capping based on the county of residence. In high-cost areas like a big city or metropolitan, the maximum lending amount by FHA in 2024 is about $1,149,825. In low-cost areas, a single-unit property may have a loan limit of up to $498,257 in 2024. The loan limits increase if the property units increase.

• Interest Rates

Competitive interest rates characterize FHA loans. That's because the FHA is regulated by a government body, which is why lenders can offer lower interest rates. The rate that the borrower gets depends on factors like the applicant's income, credit score, national mortgage interest rates, loan amount, down payment amount, and DTI.

Applying for an FHA Loan

The first step involves choosing the lender. Once finalized, you can fill out an application for an FHA loan. You must provide all supporting documents related to your income, bank statements, etc. The lender will use the submitted information to determine your best loan estimate.

To summarize, if your DTI and credit score are not well-maintained, you can look for an FHA loan. FHA loans are the best way to realize your homeownership dream. There are many benefits, including low credit score requirements and easy down payment offers. Be up-to-date on all loan parameters to get the best offer from your selected lender.