Finally ready to buy your first home? Congratulations! This is a big, exciting milestone. The journey from deciding to buy a home to closing on one is a long, complicated process. Take a deep breath and start at the beginning. The first step is taking the time to get pre-approved for a loan.
Pre-approval is essential because it will let you know what types of homes match your mortgage and the price range you’re working with. Pre-approval will save you time, money, and stress as you start your home search.
Qualifying for a loan depends on several factors. Lenders will look through your credit history, require proof of employment and assets, and examine your debt to income ratio. There are lots of affordable financing options available for almost every budget and situation.
Today, we’re going to talk about the specifics of FHA Loans.
What is an FHA Loan?
The Federal Housing Administration (FHA) is part of the Department of Housing and Urban Development (HUD). The administration has been providing affordable financing since 1934, and they are the largest insurer of home loans in the world.
FHA loans are government-backed loans offered through FHA approved lenders. This insurance provides repayment security in the event of default, giving lenders the confidence to provide funding for a broader range of people and situations due to more flexible qualifying criteria and lower down payments.
Are FHA Loans Right for You?
Due to their relaxed criteria and low down payment options, FHA loans are excellent for both first-time homebuyers and homeowners looking to refinance. There are also loan options available to finance properties requiring construction or energy efficient updates.
Borrowers can purchase a home with as little as 3.5% down. This will affect your monthly payments and influence your interest rate, but it makes the dream of homeownership achievable.
Existing homeowners can refinance up to 97.75% of their existing home.
Buyers have the option of using gifts or grants for down payments and closing costs. You’ll just need to provide gift letters or documentation confirming the money doesn’t require repayment!
Sellers can pay up to 6% of the buyer’s closing costs, which is a great option, especially for first-time homebuyers on a budget.
FHA loans have no prepayment penalties and are assumable, which allows another borrower to take over your existing mortgage at its current rate without refinancing!
Buyers will be happy to note that it’s also easier to get approved for an FHA loan after a financial hardship and the waiting time is shorter than for conventional loans.
FHA Loan Requirements
If you’re curious about what paperwork and information you’ll need to provide during the approval process, our blog over Conventional Loans has a handy explainer. You can read it here!
FHA loans will accept credit scores as low as 580, but the better your score, the better your interest rate will be.
FHA loans come in 30, 25, 20, and 15-year terms. There is also a 5-year ARM available for qualified borrowers who are interested in a shorter loan length. Shorter loans will save you bundles on interest, but the tradeoff is larger monthly payments.
There is no minimum income level! You’ll just need to make enough each month to cover the costs of your mortgage and other financial obligations. The preferred debt to income ratio in FHA lending is 31/43.
Simply put, this means your mortgage payment can't exceed 31% of your monthly income. The remaining 12% covers other types of debt, like credit card payments, student loans, and car loans.
Some borrowers can qualify for up to 55% DTI on a case by case basis.
While the standard down payment is typically 20% of the purchase price, FHA loans allow borrowers to put down as little as 3.5% up front! A lower down payment has drawbacks, however. It will increase your monthly payments and can affect the interest rate you receive.
Mortgage Insurance Premium
Mortgage Insurance Premiums (MIP) are fees used to fund the FHA’s insurance coverage of your mortgage. This insurance protects the lender’s investment if you default. The initial premium is equal to 1.75% of the loan amount, and the insurance is maintained by a small fee added to your payment each month.
Duck Brothers Real Estate
We are in the business of building relationships and giving our friends the best possible experience. We can help you find a reputable mortgage lender and guide you through the approval process with confidence.
Are you ready to reach your American Dream? Call 254-613-6326 or visit our website to speak with a licensed Realtor®.
Our experienced agents will make your home-buying experience convenient and stress-free! Our goal is to get you in your dream home as soon as possible! Let’s start today.
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