FHA loan, FHA mortgage

What is an FHA Loan in Simple Terms?

posted in: Mortgages

When discussing mortgages, it can be easy to get lost in the terminology quickly. If you are buying a home, especially if this is your first home, you may hear the term FHA loan. It’s a good idea to familiarize yourself with this term to know what it means before committing to any mortgage loan. This guidance can definitely work in your favor since FHA loans may be more advantageous for many first-time borrowers.

What is an FHA Loan?

An FHA loan is insured by the Federal Housing Administration (FHA), a part of the federal government. It was created to respond to high levels of foreclosure suffered in the 1930s. This structure provides lenders insurance against borrowers who may default on a loan. Also, FHA loans were intended to stimulate the housing market and make loans more accessible for individuals without a sufficient down payment or a stellar credit record. Despite being backed by the federal government, FHA loans are issued by a bank or other lender. These loans are popular with first-time home buyers for several reasons.

First, FHA loans require a minimum down payment of only 3.5%, which is far less than the 20% required for a traditional mortgage. The small down payment requirement is one benefit to the FHA loan since it allows people who would otherwise be unable to secure a mortgage, to purchase a home and start building equity.

Additionally, FHA loans are popular with lenders with lower credit scores than other borrowers. An FHA loan can be secured with only a 3.5% down payment for borrowers with a credit score above 580. This loan can also be an option for borrowers with a credit score as low as 500, but this would require a 10% down payment. Despite this flexibility, borrowers should remember that their credit score is still tied to the interest rate on the loan. And the lower the credit score, the higher the interest rate will be on the loan.

What are the FHA loan requirements?

While FHA mortgage loans have fewer barriers to entry than traditional loans, they still have some minimum requirements. The Federal Housing Authority sets these requirements and includes:

  • Borrowers must prove they have steady employment or have worked for the same employer for the last two years.
  • Borrowers must be lawful residents of the United States, have a valid Social Security number, and be of legal age to enter into a mortgage contract.
  • Borrowers with a credit score of at least 580 must have a minimum down payment of 3.5%, which a family member can gift. Borrowers with a credit score between 500 and 579 can also secure an FHA loan but must provide a minimum down payment of 10%.
  • New FHA loans are for primary residence occupancy.
  • These loans require a property appraisal from an FHA-approved appraiser.
  • The front-end ratio, which includes the mortgage payment plus HOA fees, property taxes, mortgage insurance, and homeowners insurance, must be less than 31% of gross income in most instances.
  • In most instances, the back-end ratio, which includes the mortgage payment plus all monthly debt payments, must be less than 43% of gross income.
  • Borrowers must be at least two years out of bankruptcy and have re-established good credit.
  • The property must meet the minimum appraisal requirements.

Is an FHA loan right for me?

Despite the flexibility of FHA loans, there are certain instances in which they would not be allowed. For example, an FHA mortgage cannot be used for any residence that is not owner-occupied. Therefore, it cannot be used to purchase real estate for investment or rental purposes.

However, all other owner-occupied homes may qualify for an FHA loan, including detached and semi-detached homes, townhouses, rowhouses, and condominiums. If the home does not meet the minimum appraisal requirements, the purchaser must request that the seller agrees to the required repairs to meet the minimum appraisal requirements. If the seller doesn’t agree to make these repairs, you must pay for them at closing. The funds are held in the escrow account until the repairs are completed.

FHA loans also have limits on how much can be borrowed, which are set by the region. In most places, the limits are set at 115% of the median home price for the county, as determined by the US Department of Housing and Urban Development (HUD).

If you meet all of the basic qualifications for an FHA loan and want to learn more about these loans, contact 7th Level Mortgage today.

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.