FHA loans are mortgages that are insured by the Federal Housing Administration. These types of loans have become very popular with first time home buyers due to the fact that they require less money down and less than perfect credit is not always a disqualifier. If your set of circumstances doesn’t match the guidelines set forth for a conventional loan, this may be an excellent option.
Why apply for an FHA loan?
There are several factors which make this loan appealing, but the two listed above seem to be its best-selling points. FHA loans only require a 3.5% down payment (this money may be gifted by a family member), and even if you have “low” or “bad” credit, you may still be eligible. This type of loan is also available for people who have declared bankruptcy or previously foreclosed on a home. Another beneficial aspect of the loan is that it’s assumable. This means that if you were to sell your home, the buyer can take over, or “assume” your loan.
FHA Loans vs. Conventional Loans:
While the aforementioned criteria make this an appealing loan for many, there are two key factors which differentiate this loan from the standard conventional loan.
- This loan requires an MIP, or Upfront Mortgage Insurance Premium. It requires you to pay a premium of 1.75% of the home’s value regardless of your credit score. This can be paid up front in cash, or rolled into the mortgage.
- An Annual MIP, or annual premium, is figured into the monthly mortgage payment. This monthly charge is based on the loan-to-value ratio, loan size, and length of loan.
Other Requirements of an FHA Loan
In addition to the aforementioned two premiums, there are several other requirements to keep in mind when applying for an FHA loan.
- Two years employment with current employer or steady employment history.
- A Social Security number, lawful residence in the U.S. and being of legal age to sign a mortgage in your state.
- Applicants must be two years out of bankruptcy and three years out of foreclosure and have reestablished good credit.
- The property must be appraised and meet certain minimum standards.
- Your debt to income ratio typically needs to be less than 55% of your income.
If these guidelines match your current circumstances for borrowing, an FHA loan might be an option for home financing.