During the 1930’s there were a rash of home forrclosures and defaults in the U.S. To provide lenders and mortgage companies with adequate insurance while stimulating the housing market the government created what is known as the current FHA program. That 1930’s FHA program allowed home loans to become accessible and affordable. Nowadays, FHA loans are very popular, especially with first-time home buyers.
What Is an FHA Loan?
Insured by the Federal Housing Administration (FHA) an FHA loan is a mortgage home loan that is insured by the FHA. Our U.S. federal government insures loans for FHA-approved lenders reducing the risk of loss if a borrower defaults on mortgage payments.
Advantages of FHA Loans
Traditionally FHA mortgage loans are easier to qualify for requiring a low down payment (appox. 3.5 percent). You can also have a lower credit score. New home owners who cannot afford the typical down payment of 20 percent or can not get approved for a private insurance should consider an FHA loan as it is the best option for these types of home buyers. FHA loans are also “assumable”, which means if you want to sell your home, the buyer can “assume” the loan you have. Potential home buyers who have low or bad credit, have gone through bankruptcy or have previously been foreclosed on may still qualify for a government insured FHA loan.
Disadvantages of FHA Loans
The catch to FHA loans: FHA loans do not have the hard standards of a conventional loan. FHA loans require two forms of mortgage insurance. One insurance premium is paid in full upfront or, it can be financed into the mortgage. The otherrequired FHA insurance premium entails a monthly payment. FHA loans also require that the home meet specific conditions and must be appraised by an FHA approved appraiser.
FHA Loan Qualifications and Requirements
- Steady employment history or worked for the same employer for the past two years
- Must have a valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state
- Must make a minimum down payment of approx. 3.5 percent. The money can be gifted by a family member.
- New FHA loans are only available for primary residence occupancy
- Must have a property appraisal from a FHA-approved appraiser
- Your front-end ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, home insurance) needs to be less than 31 percent of your gross income.
- Your back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) needs to be less than 43 percent of your gross income.
- Minimum credit score of 580
- Minimum credit score of 500-579 for maximum LTV of 90 percent with a minimum down payment of 10 percent (case by case basis).
- Typically you must be two years out of bankruptcy and have re-established good credit. Exceptions can be made if you are out of bankruptcy for more than one year if there were extenuating circumstances beyond your control that caused the bankruptcy and you’ve managed your money in a responsible manner.
- Typically you must be three year out of foreclosure and have re-established good credit. Exceptions can be made if there were extenuating circumstances and you’ve improved your credit. If you were unable to sell your home because you had to move to a new area, this does not qualify as an exception to the three-year foreclosure guideline.