Buying a home can be challenging, especially as buyer demand and rising home prices drive today’s real estate market.
For many, homebuying would not be attainable without the assistance of a government-backed Federal Housing Administration mortgage loan program.
Recent data from the state housing agencies report that about 80% of first-time homebuyers rely on an FHA loan to finance their homes.
The FHA works with approved lenders to get people qualified for mortgages. Getting approved for an FHA loan is a drawn-out but worthwhile process.
Before shedding light on some of the FHA’s unique characteristics, it’s important to know that borrowers must have a reliable income to qualify. The target property must also pass a rigorous inspection. There are some other requirements that shouldn’t be too much of a hurdle for most homebuyers.
Now, if you think an FHA loan could help you achieve your dream of owning a home, here are some things you should know before moving forward.
Low down payment option
Unlike other loans, an FHA loan is unique in that borrowers are not required to submit a large down payment. Since a down payment is based on the percentage of the home price, many homebuyers find it difficult to cover 20% of the cost up front.
With an FHA loan, however, applicants need to only supply less than 4% of the purchase price.
Note that the minimum down payment required increases with a less-than-ideal credit score.
Speaking of which, applicants of an FHA loan do not need a perfect score to get approved.
The goal of the FHA loan is to widen the doors, not make them smaller.
The relaxed borrowing terms of an FHA loan mean more people are able to qualify. Depending on the lender you work with, the minimum credit score requirement will vary.
Low closing costs
In addition to saving on a down payment, FHA borrowers will also save through low closing costs.
Closing costs are in addition to the down payment, which can catch some homebuyers off guard.
An FHA loan, however, gives homebuyers a little extra breathing room and some financial flexibility on this necessary cost, which typically ranges between 2% and 5% of the purchase price.
Mortgage insurance protects lenders in the unlikely event that the homeowner is unable to keep up.
An FHA loan requires mortgage insurance since the homebuyer will typically come in with about 3% for a down payment, which represents a small fraction of the home’s value.
Debt versus income
The amount of debt you’re responsible for versus how much monthly income you bring is known as your debt-to-income ratio.
FHA-approved lenders will ask applicants to not exceed 45%. This is the minimum level that allows the applicant to comfortably manage their finances and mortgage. To figure the debt-to-income ratio, simply divide all monthly expenses by monthly income.
Premier Mortgage Resources, LLC is not affiliated with or an agency of the federal government.