How to qualify for an FHA loan

How to qualify for an FHA loan

FHA loans can be great for first-time homebuyers as they may qualify for a down payment as low 3.5% of the purchase price. And people with lower incomes and credit scores may also qualify for FHA loans. This loan type makes homeownership possible for many.

Taking out a loan to buy a home is exciting, but it’s also a big decision that takes significant time and consideration. We want to provide you with the right information to help you make the best choices for you and your family, and this guide will help you understand what an FHA https://americashpaydayloan.com/payday-loans-wy/ loan is and how to apply for one.

What is an FHA loan?

An FHA loan is a mortgage insured by the U.S. Federal Housing Administration (FHA) and provided by an FHA-approved lender. Because it is insured by the FHA, these types of loans may allow individuals with lower incomes to be approved for loans when they may otherwise be denied.

Unlike conventional loans, FHA loans can also help make homeownership possible for people with lower credit scores, and they offer lower down payments as well. They’re an affordable option for many buyers.

How do FHA loans work?

FHA loans can give people with lower incomes or those with lower credit scores the ability to become homeowners. In order to offer a more relaxed credit requirement and a lower down payment, FHA requires you to pay mortgage insurance. If you defaulted on your loan, FHA would be responsible for paying off the remainder of your loan. Mortgage insurance limits the amount of money the lender may lose.

Mortgage insurance is considered a closing cost. Closing costs are the upfront fees required when you close on a home, and they’re separate from your down payment. Lenders and third parties can cover up to 6% of closing costs on FHA loans, including attorney, inspection and appraisal fees.

  1. An upfront mortgage insurance premium: 1.75% of the total loan amount, which is financed or paid in cash upfront when the borrower receives the loan.
  2. An annual mortgage insurance premium: 0.45% to 1.05% of the total loan amount. This premium varies with the loan term (15 or 30 years), loan amount and down payment. The annual premium is divided over a 12-month period and payments are made monthly and may be required for the entire term of the loan.

For example, let’s say you take out an FHA loan for $250,000. Your initial mortgage insurance premium would be $4,375. Your annual mortgage insurance premium would be somewhere between $1,125 ($/month) and $42,625 ($/month), depending on the rate. To stop paying mortgage insurance premiums, you’ll need enough equity to refinance to a non-FHA loan or sell your home

How do you qualify for an FHA loan?

Because FHA loans are backed by a government agency, they’re usually easier to qualify for than conventional loans. The purpose of FHA loans is to make homeownership possible for people who would otherwise be denied loans.

You don’t need to be a first-time homebuyer to qualify for an FHA loan. Current homeowners and repeat buyers can also qualify.

  • A credit score that meets the minimum requirement, which varies by lender
  • Good payment history
  • No history of bankruptcy in the last two years
  • No history of foreclosure in the past three years
  • A debt-to-income ratio of less than 43%
  • The home must be your main place of residence
  • Steady income and proof of employment

Credit score

A credit score represents how likely you are to make payments. Your credit score will also determine your down payment amount. If your credit score is at or above the minimum requirement, you’ll likely qualify for a lower down payment of 3.5%. If your credit score is below the minimum requirement, you’ll have to pay a higher down payment of 10%. Credit score requirements vary by lender.

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