FHA Loan
What is an FHA Loan?
An FHA loan is backed by the Federal Housing Administration, which is a government agency. Because this loan is backed by the government, it lets mortgage lenders offer lower interest rates, which helps home-buyers save money or increase their purchase price.
Like other loans, the FHA factors in your debt-to-income ratio, also known as the DTI. The debt-to-income ratio measures how much of your monthly income goes into paying off debt (credit cards, student loans, etc).
The lower your DTI, the better chances you have of getting approved. Lenders use this tool to see how difficult it may be for borrowers to pay their bills.
One of the main advantages to an FHA loan? Compared to other loan types, getting approved for an FHA loan is relatively easy.
FHA Requirements
FHA loans are a great option for home-buyers with less-than-perfect credit. Generally, the minimum credit score required for this type of loan is 580. Also, buyers with a higher debt-to-income ratio can still get approved for this loan. Some people can qualify for an FHA loan even if their DTI is as high as 49%.
The minimum down payment is 3.5%, which is much lower than the standard 5% to 20%. Borrowers are also allowed to acquire their down payment from “gift” sources.
Mortgage Insurance Fees
FHA loan borrowers have to pay mortgage insurance payments. These rates are fixed regardless of your credit score or down payment.
- Upfront Mortgage Insurance Premium (UFMIP): The home-buyer must pay this additional cost either at loan closing, or they can choose to pay over time (by financing this fee into the loan amount).
- Monthly mortgage insurance premiums (MIP): These monthly fees protect lenders in the event that the borrower defaults. Generally, the home-buyer has to pay the MIP throughout the entire loan duration.
FHA Refinancing Options
People with less-than-perfect credit can use an FHA loan to refinance their home. This is called FHA Streamline Refinancing. A major benefit to this “streamlined” option is that it speeds up the refinancing process, so you don’t have to provide as many documents. Also, FHA Streamline Refinances don’t require a home appraisal.
People who already have an FHA loan may choose to refinance their FHA loan into a conventional loan. This refinancing option can get rid of the monthly mortgage insurance premiums.
FHA Benefits
FHA loans are a great course of action for people who want to buy a home but have a hard time getting approved. Thanks to the FHA option, problems in someone’s credit history do not necessarily prevent them from purchasing their dream home.
Also, you can use “gift” sources to put money down for an FHA mortgage. In many cases, the source of a person’s down payment money can affect whether or not they get approved. Gift funds can be given to the borrower by an immediate family member by directly wiring the funds to escrow at closing. The amount can cover the entire downpayment and closing costs.
Another advantage to an FHA loan is the ability to later refinance into a conventional loan. This refinance option can get rid of those monthly insurance fees. When talking to your loan officer, make sure to ask about possible refinancing options in the future.
While it’s great to understand the different types of home loans, you should speak to a mortgage professional who can help you make the best decisions for you.
To learn more about the differences between FHA loans and conventional loans, click here.
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