What You Need To Know About FHA Loans
Today, getting a mortgage loan is much harder than it was before the housing crisis. In many cases, banks wont accept you without an above average credit score and a fairly sizeable down payment. While this isnt necessarily a bad thing, such changes have made it difficult for many American families to afford a home
Luckily, theres the Federal Housing Administration (FHA), a government agency that insures home mortgage loans. Getting a mortgage loan through the FHA means that you can have less-than-perfect credit
and you dont need a huge down payment. But before you go applying for an FHA loan, youll need to know what it entails.
SEE ALSO: FHA Attempting To Aid Distressed Homeowners
In terms of mortgage loans, an FHA loan is one of the easiest to quality for
. The FHA will loan to people with low or bad credit, people who have filed for bankruptcy, and people who have a foreclosure on their records. It is a godsend to people that dont want to rent and have the financial stability not to, but not the record to prove it.
Down payments are even easier with an FHA loan, too. Traditionally, lenders ask for a down payment of 20 percent when lending. This number has only become stricter after the housing bubble. The FHA, on the other hand, asks a lot less of buyers. While the numbers for a down payment depend on a persons financial history, a down payment of at least 3.5 percent is required
. Another advantage to this type of loan is that it is assumable, meaning that if you sell your home, a buyer can assume the loan you received instead of taking out a new one. This is often easier and less costly than buying a home from the owner and getting a new mortgage.
Despite how easy it might seem to acquire an FHA mortgage, there are some requirements for FHA loans
. They include, but are not limited to:
- A minimum credit score of 580 to get maximum financing
- A steady employment history with the same employer for two or more years
- A valid social security number, legal residency in the US, and of age to sign a mortgage
- Home must be a primary residence
- Must be two years out of bankruptcy
- Must be three years out of foreclosure
- A front end ratio (basically, everything that goes into purchasing and maintaining your home) of less than 31 percent of your gross income
- A back end ratio of (mortgage payment plus the rest of your debt, like student loans) of less than 43 percent of your gross income
Mortgage Insurance Premiums
The other side of the FHA mortgage coin keeps many away from accepting it: there are two types of mortgage insurance premiums (MIPs) that borrowers must pay
. One is paid in full upfront and the other is rolled into the monthly payment for the loan.
The Upfront MIP payment is a bit deceiving. It can either be paid upfront or rolled into a monthly mortgage payment. Regardless of a persons credit score, borrowers must pay 1.75 percent of the home loan for this premium
The Annual MIP is figured into your monthly mortgage payment
. This premium is a bit more complicated in that it is not a set percentage rate of the mortgage. Depending on your loan term (greater than, less than, or equal to 15 years) and loan amount (in reference to a $625,000 marker), your Annual MIP could vary.
The duration of MIP charges depends on your loan-to-value ratio. As of June 2013, everyone who takes out an FHA mortgage has a MIP for either 11 years or the entire loan term.
SEE ALSO: FHA Kiddie Condos: College Housing And Investment
Is An FHA Mortgage Right For You?
Depending on your current economic circumstances, an FHA mortgage might or might not be right for you. To find out how much an FHA mortgage will cost you, request a Good Faith Estimate (GFE) from an FHA approved lender
. Also request estimates from other types of lenders to get a good idea of what your best option would be. Making an informed decision on an FHA loan is key to your overall happiness in your home.