What is an FHA Loan?

WHAT IS AN FHA LOAN?

For some people the dream of home ownership appears likely to remain just that, for those already on the property ladder, their mortgage is nothing more than a financial burden. But this doesn’t have to be the case. Since its inception in 1934 a Federal Housing Administration (FHA) loan has been helping borrowers get their first step on the property ladder and ensuring they keep it there. The FHA is the largest insurer of residential properties in the world.

How does an FHA loan work?

At its most basic, an FHA loan is a government insured mortgage that aims to make it a little easier for people to borrow. These types of loans have become extremely popular in recent years with potential homeowners having the option to choose between a number of fixed-rate or adjustable loans. As the loan is insured by the FHA your initial down payment is smaller and you don’t need to have the world’s greatest credit score.

These types of loans are designed to help first-time buyers who might ordinarily struggle to get a mortgage, as down payments can be as low as 3.5% of the purchase price.

What are the benefits of an FHA loan?

There are numerous benefits to getting a loan from an FHA approved lender. These include the fact that:

• It is often one of the easier types of mortgage to qualify for.
• Credit score requirements are normally far lower than for normal loans.
• Down payments can be as low as 3.5% with a credit rating of 580 or higher.
• The loan is assumable, which means if you sell the property the buyer can “assume” the loan you have taken out.

Is it right for me?

An FHA loan is not necessarily the best option for everyone. Often applicants are younger first-time homeowners who don’t have a lot of spare cash for a larger down payment. Although they aren’t just for first-time buyers. FHA loans can also be useful for people who have gotten into bad debt situations or are facing foreclosure on a conventional loan.

One thing to remember though is that the lower the interest rate, the higher the rate you will be asked to pay back. Secondly, as FHA loans are slightly easier to access than conventional loans it does require that the borrower pays two different insurance premiums. One is upfront and the other is charged monthly. These fees are not necessarily exorbitant, but it is crucial you are made aware of all the potential costs before deciding to take out the loan.

Am I eligible?

To qualify there are a few criteria you will need to meet. First, you’ll need to demonstrate to your lender that you have the means to pay back the loan. So you will have to provide proof that you have been receiving a steady income over the previous two years. You will also be asked to show evidence that you are currently employed. And you must also have a valid Social Security number and lawful residency in the US. Borrowers must also have a property appraisal carried out by an FHA-approved appraiser. The property must meet the minimum standards of the FHA appraiser. If the seller doesn’t agree to the repairs the appraiser suggests, it is possible the borrower will have to pay for the repairs themselves.

In most cases you’ll need to be at least two years out of bankruptcy and have re-established good credit. Though exceptions are made in some cases. Similarly you must be three years out of foreclosure, although if there are extenuating circumstances as to why this is not possible, this can ignored. Once these criteria have been met, your credit score will be checked. At this point, if the lender is happy, then you can make a down payment on the loan.

What if I have a low credit rating?

A poor credit score doesn’t necessarily disqualify you from getting a loan. It just means that your initial down payment might be a little bit higher. To put some figures on it, a FICO rating of 580 or above will mean you qualify for a 3.5% down payment. If your credit score is between 500 – 579 you will have to provide a 10% down payment.

What is the lending limit?

As always lending limits differ from state to state and county to county. So what you might be offered in Florida might not be the same as in Texas. However, the biggest issue affecting how much you can borrow will be your credit rating. This is why pre-qualifying for the loan is a good idea as you get an idea of how much you can afford to borrow and then can look for a property within that price rage.

The price of your home is the second major factor in determining how much you can borrow. You will have to have the house valued by an FHA appraiser so are under no obligation to just accept what the seller wants for the house. The FHA won’t insure a loan for more than what they deem to be the property’s market value.

What type of building you are insuring is also a factor in the loan amount. So whether it’s a condominium or a single unity home, for instance, will have an impact on the size of loan you qualify for.

It is possible in some counties to get financing for a loan up to $729,750 although conventional financing for loans stands at $625,000.

Why should I choose Simple Fast Mortgage?

We know that applying for a loan can sometimes be a complicated and even stressful business. That’s why we pride ourselves on ensuring the process is as transparent and simple as possible. With decades of experience in helping people make their dream of home ownership come true, we know how to make borrowers feel at ease.

If you have any questions at all, are wondering whether you are eligible or simply want to know more about FHA loans, please get in touch and we’ll do our best to help.

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