What is an FHA loan?

Technically, it itself is not a loan. Rather, it means that the Federal Housing Administration has your back. They will insure your loan even if you have fair or poor credit, a low down payment (at least 3.5%), or have experienced bankruptcy or foreclosure. This makes lenders more inclined to help you out and offer you a loan because it reduces their risk of loss if you default on your payment.

The FHA program has been helping borrowers who normally could not qualify for a loan since the 1930s as a way to stimulate the housing market. Typically, these types of loans have been primarily offered to military families, the elderly, handicapped, or lower-income families, but anyone can get one. They are not just for first-time buyers either.

In fact, the FHA loan is the easiest loan that you can qualify for. They are available for both purchasing a new home and refinancing your existing home. It requires a low down payment and your credit does not have to be perfect, which makes things easier on you. Should you need to sell your home, your loan is "assumable" which means that the buyer can pick up where you left off. 

If this type of loan would benefit your situation, don't hesitate to get the process started! Here is what you need to qualify:

• Have steady employment for the past two years.
• Have a valid Social Security number, be a U.S. citizen and be legally old enough to sign a mortgage depending on your state's age requirements 
• Make a minimum down payment of 3.5% on your new house. Or you can put 10% down if your credit score is between 500 and 579. This money may be gifted, whereas other loans do not allow this.
• Have a property appraisal from an FHA-approved appraiser.
• The mortgage payment will need to be less than 31% of your gross monthly income including principal, interest, property taxes and insurance.
• Monthly debt cannot be more than 43% of your monthly income, including mortgage, credit cards, car payments, student loans, etc.
• Have a minimum credit score of 500.
• Cannot have a bankruptcy within the past two years
• Cannot have foreclosure within last three years

There are a few disadvantages to the FHA loan since it does not hold the same strict standards of a conventional loan. It requires two kinds of mortgage insurance premiums, one of which is paid upfront in full or financed into the mortgage, and the other manifests as a monthly payment. Your house will also need to meet certain conditions and must be appraised.

Posted in: FHA,Loan types