FHA Loan Program Qualification And Approval
Mortgages insured by the Federal Housing Administration are known as FHA loans. First-time home buyers find these loans especially appealing because they have less strict requirements in comparison to conventional loans. Qualifying for an FHA loan only requires a 3.5% down payment and a credit score of 580 or higher. People with a credit score between 500 and 579 can also qualify if they are willing to put down a 10% down payment. In comparison to the high credit scores required for more conventional loans this is quite generous.
The FHA program has a fascinating history. It was started in the 1930s due to the high numbers of defaults and foreclosures. Thanks to this program lenders have enough insurance to help in the stimulation of the housing market. The FHA accomplishes this by making loans affordable and accessible to people who can only afford smaller down payments and those with lower credit scores. The federal government insures that loans provided by private lenders can be approved and it reduces the risks involved in the case of a default on mortgage payments. People with lower credit scores and less money for down payments are able to get access to loans and the opportunity to own a home thanks to this program.
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FHA Loan Benefits
FHA loans are generally easier to qualify for than conventional loans. A small down payment and a credit score which is less than perfect doesn’t prevent homeownership with FHA loans. With a 3.5% down payment and a credit score as low as 500, FHA loans are available to borrowers and they can start the process of owning a home.
FHA loans are assumable loans. An “assumable” loan is a loan which can be transferred to the new homeowner if the borrower sells their property.
Another advantage to FHA loans is that they are still available to individuals who has undergone foreclosure or bankruptcy after a waiting period. The waiting period is much less than is standard with conventional loans
Mortgage Insurance on FHA Loans
Because FHA loans do not carry the strict requirements of conventional loans, borrows need two types of mortgage insurance. One of the insurance premiums is paid upfront or can be incorporated into the mortgage. The other insurance premium is paid as a monthly payment.
The upfront mortgage insurance premium (UFMIP) is, as the name implies, a one-time upfront premium payment. It is a payment of 1.75% of the loan amount and it must be paid regardless of other factors such as the borrower’s credit score. For example, if the loan is $250,000, the UFMIP will be $4375. This sum can be paid upfront by the borrower or the borrower can opt to roll the payment into the loan.
The annual mortgage insurance premium is an annual insurance fee. It is charged monthly and will be included in the monthly loan payment. The exact amount paid depends on the length of the loan, the loan size, and the loan-to-value ratio. The premium is generally between 0.8% to 1.05% of the loan amount.
Mortgage Insurance Terms
The loan-to-value ratio, the amortization term, and the loan’s origination date all impact the mortgage insurance premium. Loans with case numbers assigned on or after June 2013, require borrowers to pay the insurance premium for the entire loan term if the loan-to-value ratio was greater than 90% during the originated time. For cases where the loan-to-value ratio is 90% or lower, the borrower will pay the insurance for either the mortgage term or for 11 years, whichever comes first.
Requirements to Qualify for FHA Loans
The Federal Housing Administration decides the requirements for FHA loans. The FHA website has a complete list of requirements for obtaining the loan. A few of the most important requirements are listed below:
- You must have steady employment or have worked for the same employer for at least the past two years
- You must possess a valid social security number, have lawful residency in the US, and be of legal age to sign a mortgage.
- You must pay the loan’s 3.5% down payment, though this amount can come as a financial gift from a charitable organization, employer, or a family member.
- New FHA loans are only available for primary residency occupancy.
- You need to use an appraiser approved by the FHA.
- To qualify for only paying the 3.5% down payment, you are required to have a credit score of 580 or higher. Those with lower credit scores may also be able to qualify under certain circumstances. Those with a credit score of 500 to 579, can still get an FHA loan as long as they can provide a 10% down payment.
- You should be at least two years out of bankruptcy. You must also have re-established a good credit score. If the bankruptcy was caused by elements outside of your control and you have shown proper money management for over a year, there might be exceptions.
- You should be at least three years out of a foreclosure and have re-established a good credit score.
FHA Loan Limits
The FHA has maximum limits on the mortgages you can use FHA loans for. It is important to check out what your limits are when applying. These limits are dependent on the county and area where you are buying the home. In areas with higher home prices you may be able to take out a larger mortgage.
Applying for FHA Loans
First, you need to find a lender who is approved by the Federal Housing Administration. There are many lenders approved to provide these loans, and it is important that you go with the lender who best meets your needs. ABLEnding, Inc. is approved by the FHA, we can help you! Call or contact us today!