Buying a home can be an emotional rollercoaster. The mere prospect of having your very own property fills you up with excitement and joy. At the same time, very few people have the kind of money needed to buy a home, just lying around. As a result, they have to seek out a lender. This process forms the counterweight to the highs of homebuying. Securing a loan can be a complicated and stressful process, especially for first-time applicants.
While there are many options, FHA Loans are one of the more popular ways for first-time homebuyers to secure the house of their dreams. If you've been knee-deep in research for a while, you'll already know this. So today we'll look at some key facets of FHA loans. Such as FHA loan requirements, their limits, types, and performance against conventional loans.
FHA Loans: What are they?
The FHA is the Federal Housing Authority, formally recognized as part of the U.S. Department of Housing and Urban Development in 1965. The true origins of the body lie in the great depression of the 1930s when the housing bubble crash resulted in a string of foreclosures across the country.Verify my mortgage eligibility (Sep 27th, 2023)
FHA loans are federally backed loans provided to middle to low-income borrowers. They are popular as a result of their lower down payment and credit requirements. Fewer barriers to entry allow for a larger pool of people to access them. It is important to note that the FHA is not a lender itself, it is simply the guarantor for these loans. You must apply for an FHA loan with an approved lender.
Types of FHA loans
FHA loans can be divided into 5 categories. You will apply for the type that is most appropriate based on your needs.
- 203(b) – Standard Home Mortgage
These loans can be used to finance various types of homes, such as townhouses, condos, single-family and, multi-family homes. The term period for such loans is either 15 or 30 years.Verify my mortgage eligibility (Sep 27th, 2023)
- 203k - Rehabilitation Mortgage Insurance
203k loans package mortgage finance with renovation finance, allowing you to buy a home and improve it with one loan. This prevents you from having to secure multiple loans.
- Title I – Property Improvement Loans
If you wish to buy a ready-made home or make improvements to the one you already own, then this is the loan for you.
- EEM - Energy Efficient Mortgage
An EEM allows homebuyers to secure a loan, and financing to make the home more energy-efficient. It is also available to people who already own a home and wish to make it more energy-efficient.Verify my mortgage eligibility (Sep 27th, 2023)
- CP - Construction to Permanent Ownership
Facilitate the purchase of the land the home will be built on and finances the cost of construction.
FHA Loan Requirements
To qualify for an FHA loan, you will have to meet certain requirements. Below are the minimum requirements to qualify for an FHA loan. You should keep in mind that the minimum requirements are provided by the FHA and that approved lenders will add their own stipulations.
This shouldn't come as a shock to anyone since credit scores are the basis for most lenders' evaluations. Part of the FHA loan requirements is a minimum score between 500 to 579. The fact that it's federally-backed means there is more leniency than traditional loans. Practically, this means that even if you have a credit score of 500, you can still secure a loan. However, the terms won't be as appealing.Verify my mortgage eligibility (Sep 27th, 2023)
As mentioned previously, these are only the minimum requirements. Most approved lenders ask for a score of at least 620. So, if you don't have a good credit score, it is recommended that you don't go home shopping just yet.
Lenders need to be able to determine how you'll pay for the loan. This is why your employment status plays a huge role in the approval process. Lenders will evaluate your income level through tax returns and pay stubs. They will also look into how long you've been in your current position. This should be at least 2 years.
You are not allowed to take on a loan that is more than 50% of your income. Ideally, it should be no more than 43%. Even though a higher DTI doesn't immediately disqualify you, it does result in unfavorable terms for you. The calculation is made by adding all the monthly payments divided by your monthly income prior to taxes.Verify my mortgage eligibility (Sep 27th, 2023)
FHA Loan vs. Conventional Loan
We've talked about how FHA loans are preferable to standard mortgages, but you're probably wondering what exactly is the outcome of FHA loan vs conventional loan. So, let's take a look.
- Lower requirements for qualification
FHA loans allow for people with credit scores as low as 500 to secure a home loan. Most traditional lenders have far higher credit requirements.
- Lower down payment
Traditional lenders will ask for a 5% down payment, and if you don't have that kind of money, FHA loans are ideal. FHA loans accept down payments as little as 3.5%.Verify my mortgage eligibility (Sep 27th, 2023)
- Lower limits
Conventional loans have to follow conforming loan limits, while the FHA has to follow its own. FHA loan limits have traditionally been lower than conventional loans.
- Insurance Premium
FHA loans come with insurance premiums built into them. You have to pay them in two installments, with the first one due at the time of closing. Conventional loans do not require doing so if your down payment is higher than 20%.
FHA Loan Limits
The exact limits to how much you are allowed to borrow vary from county to county. Limits are divided into floors and ceilings and are determined by the cost of living in that area. The floor for a one-unit home in a low-cost area could be as low as $331,000, while the ceiling for the same in a high-cost area could be as high as $765,000. FHA loan limits are updated each year based on changes in house prices.
An FHA loan is a great way to finance your first home, as the FHA loan requirements are low enough for most people to qualify. To apply for an FHA loan today, click here.Show me today's rates (Sep 27th, 2023)