FHA Loans
An FHA loan is a loan that is provided by the Federal Housing Administration. This means that the loan is federally backed and insures the loan. This is a loan that can only be offered by qualified lenders and was designed to help those with low-income or moderately low-income to buy homes of their own.
What one will find when applying for an FHA loan is that it is different than other home loans that are out there. The requirements are different than if you were to walk into your bank and say, “I want a home loan.” There are steps that need to be taken and it is up to the bank to make sure all qualifications are met so that the Federal Housing Administration will, in fact, back the loan.
Obtaining the loan
You will first need to contact an FHA-approved lender. You can do this by calling the banks in your area, looking online, or asking a real estate agent. But do not stop with the first bank that tells you they do provide FHA loans. If you continue calling around and you ask about interest rates, you will find that the individual lenders have different interest rates. You definitely want to secure the best rate because high rates can result in you paying thousands more for your home than you have to.
From there you can then:
- Obtain the credit and income qualifications for your specific area. These qualifications are different from area-to-area.
- Find out the maximum loan amount for your area. It is typically $151,725, but can be lower based on geographic location.
- Fill out a loan application with all of the requested information and provide any required documentation to the lender.
- Prepare yourself for a down payment of 3% to 5%, depending on where you live. An advantage here is that the closing costs are 2% to 3% of the purchase price, but you can finance your closing costs.
- Due to the fact that you are putting down a down payment, you will need to pay for mortgage insurance. This insurance covers the risk that the lender is taking on you. The up front premium that you must pay can also be financed along with your closing costs. From there, monthly premium payments will be paid with your mortgage payment.
As far as credit obligations go, a lender will take a look at past and current payments on credit accounts. If the payments have been made on time, then this shows you are a reduced risk. Lenders will sometimes not look at minor derogatory information, but they do look for signs of financial mismanagement, even if income is sufficient. The lender will also look at your debt to income ratio, which is to not be more than 29% on an FHA loan.
Pros and cons
Just like with anything, there are pros and cons, but they are few. An FHA loan does allow individuals who would not qualify for a traditional loan the chance to buy a home. However, there are strict limits such as having a cap on the maximum amount that can be borrowed. This sometimes runs individuals into having to apply for a traditional loan through the bank. Nevertheless, this is one of the options available to help more people buy homes.