Home ownership in the US is not easy because you need to secure a loan first. Sometimes this takes time or worse, you can get disapproved. All hope is not lost though because of the FHA (Federal Housing Administration) loan. FHA loan is a home loan accessible for low to moderate-income buyers.
In this setup, the private lenders like credit unions and banks release the loans with FHA backing. This means that if you default your payment, the FHA will pay the lender. With this, the lenders are eager to make mortgage loans. Through the scheme, home ownership rates in the US rose significantly over the years.
If you are thinking about getting a house, it is time that you know the basics of FHA loans. Here’s an overview:
The benefits of FHA loans
FHA loans provide one of the most attractive features. Features include the following:
- Smaller down payment: FHA loans are designed for low to moderate-income buyers because it offers smaller down payment compared to traditional mortgage loans. For as low as 3.5% down payment, you can own a house. However, if you have larger money for down payment, it is better because you will save money on interest costs in the long run.
- No prepayment penalty: for FHA loans, there is no prepayment penalty. A prepayment penalty is a fee that lenders charge for borrowers who pay off loans early.
- Assumable loans: if your loan is assumable, a buyer can take over your payment. The good thing about this is they can benefit from lower interest costs since you already went through highest-interest years.
- Opportunity to reset: if you have a history of foreclosure or bankruptcy, you are likely to be approved quickly. This means they are giving you the opportunity to reset.
FHA loans are easier to qualify because of the backing and other elements. The qualifications of FHA loans include the following:
- Income limits: an FHA loan states that there is no minimum income required.However, you just need to show that you have sufficient income to repay the loan.
- Debt-to-income ratios: you need a reasonable debt-to ratio income. This is how you will measure your ability to manage monthly payments and repay your debts at the same time. To qualify, the amount that you spend on monthly loan payments should be low compared to your monthly income.
- Credit scores: with low credit scores, people can get approved for FHA loans. If you take 3.5% down payment, your score can be as low as 580.
- Loanable amount: in general, you are only limited to borrow amounts relative to the home prices within your areas. With this, it is important that you check first local prices to have an idea. If you need more loan amount, you can try jumbo loans but you have to have a strong credit to qualify.
You already know that FHA loan is not for everybody. For borrowers who can afford a large down payment, they are better off with a traditional mortgage because they could save more money in the long run through lower interest rates and insurance premiums. To know more, check information online. Otherwise, you can consider an FHA advisor to help you determine whether this mortgage is right for you.