Home buyers, and first-time home buyers in particular, may choose an FHA loan to fund their mortgage. These loans are backed by the Federal Housing Administration (‘FHA’), an agency of the government that protects lenders from incurring losses if a borrower defaults. Borrowers who may have faced credit challenges or may not have a large down payment may find an FHA loan to be an option for them.
If you’re looking for a mortgage, here’s what you should know about FHA loans:
Requirements of an FHA Loan
Down Payment: If you’re interested in an FHA loan, there are specific down payment requirements. FHA down payment amounts may be either 3.5% or 10% depending on your credit score. A lower credit score may require a larger down payment. The down payment may also be a gift from a friend or family member. There are specific guideline requirements for qualifying gift funds. Talk to your lender to clarify the verification and paperwork involved when using gift funds.
Credit History: A previous bankruptcy filing may not prevent FHA loan approval if it was discharged more than two years ago. There may be some exceptions that could allow you to qualify earlier. A borrower who’s demonstrated reestablished credit and is three years past foreclosure may also be eligible.
Employment History: Additionally, a steady history of employment for the past two years is often required. Having worked with the same employer, or within the same industry or field, can help to demonstrate a steady employment history.
DTI: The FHA also looks at your debt-to-income (‘DTI’) ratio to help ensure that you're able to cover your recurring debts when you purchase a home. There are two DTI ratios considered: the ‘front-end’ DTI ratio, which computes all the monthly debt related to housing (property taxes, mortgage payments) and the ‘back-end’ DTI ratio that includes both housing and other monthly recurring debt (mortgage payments, credit cards, student loans, etc.). These recurring monthly debt payments are weighted against your gross monthly income to determine your back-end and front-end DTI.
Mortgage Insurance Premium: Mortgage insurance (“MI”) will be required with an FHA loan. You must pay an annual fee, in addition to an upfront mortgage insurance premium. Unlike other closing costs, you can't roll the MI fee into the loan. You can, however, potentially cancel the annual mortgage insurance premium at a certain point, dependent on the amount of the down payment, the term of the loan and the date upon which the application was taken. Review the FHA's website for more details. It's also possible to later remove MI requirements by refinancing the FHA loan to a traditional loan.
Other Considerations: For an FHA loan, you must be the primary person occupying the home and it must be for your primary residence. An FHA-approved appraiser must appraise the property you wish to buy. The property itself must meet minimum standards set by the FHA.
Benefits of an FHA Loan
A material benefit of an FHA loan is that you may be able to buy a home with a small down payment. This is an advantage for those struggling to save enough for a large down payment on a new home. And a foreclosure or bankruptcy in your past may not prevent FHA loan approval, so an FHA loan may be a viable route for those with who have experienced credit challenges.
FHA loans also may allow the use of gift funds towards your down payment and/or closing costs.
The benefits of an FHA loan make it an excellent choice for many home buyers. Everyone has different circumstances and requirements, so finding out what’s best for you and your family is key. Here's a calculator that can help you determine what your FHA loan payments will be based on your purchased price, down payment, term, and interest rate. NASB has FHA mortgage experts that can help you make the right decision. Give us a call at 855-465-0753, or click here for a free rate quote.