One of the biggest problems that people face, when they are looking to buy a property, is finding the down payment. The amount that is needed depends on the lender and individual circumstances, but it can be around 20%, for a traditional home loan. This is one reason why FHA loans are popular with many people. The down payment required is low. Credit score requirements are also less rigid.
You can check out a conventional loan vs FHA comparison, to learn more about other differences. So, is an FHA loan a good idea for you, and are you likely to be approved for one?
The benefits of an FHA Loan
Let’s start by looking at what an FHA loan is and what benefits come with it. FHA loans are insured by the Federal Housing Administration (FHA). They were first introduced in the 1930s when foreclosures were common. They enable people to get a loan with a down payment of 3.5%, if their credit score is 580 or higher, or a 10% down payment if their credit score is 500-579. Of course, this does not mean that applicants are automatically approved for a loan. There are requirements that need to be satisfied.
Requirements for an FHA loan
Down payments and credit scores are just two of the considerations, when it comes to making decisions on FHA loan applications. There are several other requirements that are laid out by the FHA. These requirements include:
- A steady employment history.
- Legal residence in the US.
- Application is being made for a primary residence.
- Property has been appraised by an appraiser that is approved by the FDA.
- Ratio of housing costs to income is less than 31%.
- Ratio of total debt to income is less than 43%.
- Normally, two years out of any bankruptcy proceedings and three years out of any previous foreclosures, with current good credit.
It’s important to remember that all lenders still make individual decisions, so there is no guarantee of being accepted for an FHA loan.
Mortgage insurance is a necessity
One thing that you need to be aware of, if you are applying for an FHA loan, is that you will be expected to pay for mortgage insurance. It’s a requirement when this type of home loan is involved. This is an important consideration as you actually need to pay two different types of insurance if you are awarded an FHA loan.
The Upfront Mortgage Insurance Premium (UFMIP) is 1.75% of the loan and can be paid as part of closing or can be factored into monthly mortgage payments. The Annual MIP is known as an annual premium but is paid monthly. The amount payable is a percentage of the overall loan amount.
You can see that an FHA loan can be a good option for anyone who is looking to buy a property but cannot afford a high down payment. However, you need to remember that you are not guaranteed to be accepted and that if you do get awarded a loan you will need to pay for insurance as well.