If you are in the market to buy a home, you might be considering a few different loan options. Have you heard of the FHA Loan Programs? These are an alternative to conventional loans backed by the Federal Housing Administration and are perfect for first-time homebuyers or people on a tight budget.
Read on to learn more about the details of the available FHA Loan Programs and how they can benefit you.
What Is an FHA Loan?
An FHA loan is different than a conventional loan because it is backed by the U.S. government. You can receive an FHA loan from an approved lender of your choice, but the Federal Housing Administration will always back the loan. This makes the loan less risky for the bank, which means people who would normally get declined by a conventional loan have a chance of getting approved for an FHA loan.
With an FHA loan, you could put as little as 3.5% down on the house of your dreams. Most conventional loans require a down payment of at least 20%.
The FHA offers several different loan programs, and you can view them all here.
A More Approachable Down Payment
You may have heard that the golden rule for a down payment is 20%. This is not the case with an FHA loan which means buying a home can be a reality for people who aren’t able to save up a large sum of money. Half of millennial renters admit that saving up for a down payment is the number one reason keeping them from purchasing a home.
The ability to purchase a home with only 3.5% down is a great stepping stone for people who want to enter the homeowners club.
How to Qualify for an FHA Loan
Qualifying for an FHA loan is much like applying for any other type of loan. Since an FHA loan can help first-time homebuyers, FHA lenders have more specific qualifications because they want to make sure the borrower can pay off the mortgage in full.
One of the most important ways to qualify for an FHA loan is to show proof that you can afford the monthly mortgage payments. You can do this with bank statements and showing proof of employment. Being employed for at least a year is preferred.
Also, in order to finance your first home, you must have a decent credit score. If you are putting down at least 10% on your new property, you will need to have a credit score of at least 500. If you are putting down only 3.5%, you must have a score of at least 580.
With this type of FHA loan, if you put less than 10% down on a property, you will be required to purchase a mortgage insurance premium (MIP.) MIP can be added to your monthly mortgage payment, or you can pay it as an annual lump sum. This is to ensure that the bank is covered if the lender is not able to cover the monthly payments or pay off the mortgage in full.
The property you wish to fund must also be your primary residence. You cannot use an FHA loan for an investment property.
The loan officer will also take into consideration your debt-to-income (DTI) ratio. This tells the lender how much debt you currently have. This information will give the bank further assurance that you can pay off the loan.
Your DTI ratio maximum is 43% – 50% for an FHA loan. This means that no more than50% of your income is currently going toward debt.
How to Apply for an FHA Loan
Applying for an FHA loan is similar to the application process of conventional loans. First, you must find a bank or lender that is approved for FHA loans. Then the loan officer can walk you through the process. You may also want to take the time to compare banks and lenders as some may offer slightly different fees and rates.
Before applying, you will want to have some documentation ready for the application. Paperwork like bank statements, 2 years of tax returns,debts and their monthly payments,proof of employment, and your credit score will be checked. Since the lender is potentially underwriting a huge loan with a very low down payment, more documentation will be required than with a conventional loan. Some lenders may allow you to complete the application process online.
Other FHA Loan Programs
You may also reap the benefits by receiving a loan just to cover the down payment of your home. This makes the barrier to entry on homebuying practically zero.FHA loan assistance programs may vary depending on where you live, so make sure to check your local FHA office for questions.
The Federal Housing Administration offers several other loan products that can help you if you already own a home. You can take advantage of an FHA loan reduction program. If you have already received an FHA loan, you can apply to this program to lower your monthly mortgage payments.
First Time Home Buyers Programs
If you are a first-time homebuyer, you are now aware that there are tons of options available if you have not saved up 20% of the value of your dream home. With the various FHA loan programs, buying a home can be just around the corner for you.
If you enjoyed this article about FHA loan programs, make sure to check out the rest of our blog.
7th Level Mortgage is a leading one-stop mortgage company providing deeply informed, custom-tailored assistance with each mortgage transaction phase. If you are searching for a home loan in New Jersey, Pennsylvania, Delaware, Maryland, New York, or Florida, please contact us today so that we can determine the best Mortgage Lender to place your loan with and get you the best possible rate and program.