Trying to find a lower interest rate? Looking for a smaller down payment? Served in the military? If you find yourself asking these questions, you’re probably searching for a Conventional, FHA, or VA loan. Get A Rate can advise you about which option is best for you to get started today.
How To Get An FHA Loan: Everything You Need To Know
The real estate market is on fire thanks to record low-interest rates. So, not surprisingly, a lot of people want to snatch up their dream homes now. But what happens when you don’t have a stellar credit score or a ton of cash to put towards a down payment? Enter an FHA Loan. The Federal Housing Administration (FHA) loan helps borrowers with easier mortgage approvals, lower mortgage rates, and greater term flexibility. Sounds appealing? Here is everything you need to know about how to get an FHA loan.
What’s an FHA Loan?
In short, an FHA loan is a loan that the Federal Housing Administration will insure for lenders that might typically be considered too risky. With this insurance to cover potential default payments, lenders can offer better rates and lower some upfront costs. FHA loans were specifically designed to help borrowers with poor credit, not a lot to put towards a down payment, higher debt-to-income ratios, and those who have bankruptcy/foreclosure histories. An FHA home loan can be used to buy or refinance a home.
How to Qualify for an FHA Loan
Although there are fewer restrictions to secure an FHA loan, there are some minimum requirements in key areas you’ll need to meet to qualify.
- Credit Score: You will need a credit score of at least 580 to qualify for a loan. If yours is between 500 and 579, you could still be eligible but will need to make a larger down payment.
- Down Payment: If your credit score is 580 or above, you only have to put down 3.5%. If your score falls in that 500 to 579 range, then you’ll be required to put down 10% of the purchase price.
- Debt-to-Income Ratio: The FHA requires that your DTI is less than 43%. That means your total monthly debt can’t more than 43% of your pre-tax income.
- Employment: You don’t need to make a certain income, but you will have to show steady employment.
- Type of Property: The home being purchased must be the borrower’s primary residence. An FHA appraiser must approve the property to meet set standards defined in FHA guidelines.
It’s important to note that some lenders might have additional stipulations. So, you’ll want to compare several FHA-approved lender offers.
FHA Loan vs. Conventional Loan
You might be wondering if an FHA loan is a better option than a conventional mortgage. To determine which is best for you, it’s important to know the differences. Here are a few.
- It’s easier to qualify for an FHA loan than a conventional one, thanks to fewer restrictions and requirements.
- FHA loans will help those with lower credit scores and cash for a down payment than a conventional loan that typically requires higher credit scores and 20% down.
- The rules for getting down payment money via a gift or family are more liberal than those associated with a conventional loan.
- You may have to pay additional closing costs with an FHA loan that aren’t required with conventional loans.
- You will have to obtain mortgage insurance with an FHA loan.
- There will be loan limits that will vary by county. Those limits range from $356,362 to $822,375, depending on location.
Pros and Cons of FHA Loans
FHA loans are attractive for many first-time homeowners because of the easier mortgage approval process, lower down payment options, and competitive low mortgage rates. But, it’s important to weigh the pros and cons.
Pros of FHA Loans
- FHA loans are easier to qualify for.
- You’re only required to put down 3.5% of the home value as a down payment.
- You don’t need to have perfect credit.
- FHA loans are also “assumable,” which means that the buyer can take over your loan if you sell your home.
Cons of FHA Loans
- You will have to pay monthly mortgage insurance premiums, which will increase your monthly cost. That will last the full term of the loan if you put any less than 10% down.
- You will have to pay an upfront mortgage insurance premium, which is 1.75% of the total home loan, no matter how high your credit score.
- Jumbo loans aren’t allowed. That means your loan amount can’t go over the borrowing limit for the area.
For more information on FHA loan requirements and costs, visit the U.S. Department of Housing and Urban Development (HUD). Or, talk to a Get A Rate local home loan specialist to discuss whether you qualify for an FHA loan.
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