An FHA loan is not – as many first think – a loan from the FHA. Rather, an FHA loan is a loan insured by the FHA, lent by an approved mortgage lender.
The Federal Housing Administration was formed as part of President Roosevelt’s New Deal to revive the economy after the Great Depression. By insuring loans given to low- and middle-income borrowers, the FHA loan reduces risk to the lenders should the borrower default. The loan also comes with reduced down payments. Borrowers with a credit score of 580 or higher can expect to pay a down payment of as little as 3.5%, while borrowers with a credit score below 580 should expect to pay 10%.
The reduced down payment does come at a cost, however, because borrowers must pay for mortgage insurance. This is just one of the handful of requirements for receiving an FHA loan. For more on these requirements, read on.
FHA Loan Requirements
As mentioned above, FHA loan borrowers must have mortgage insurance. Borrowers can expect to pay a mortgage insurance premium upon taking out the insurance called an upfront mortgage insurance premium, followed by a lower monthly fee called the annual mortgage insurance premium. Borrowers are expected to keep their insurance for the duration of the loan. Insurance rates will be determined by how long the borrower will take to pay off the loan.
A home appraisal by an FHA-approved appraiser is also required. The appraiser will inspect the house and property, inside and out. They will take photos to document the state of the home at the time of purchase with the FHA loan. These photos will be kept with the file for the loan. During these inspections, the appraiser’s concern is ensuring that the buyer is purchasing a livable space, which means they will be paying attention to any issues that could compromise the health and safety of the buyer.
Some of the requirements include a consistent history of employment and an appropriate debt-to-income ratio, which a lender will help you calculate.
Who Should Seek an FHA Loan?
FHA loans are intended to help lower-income borrowers be able to afford housing. They are meant to encourage home ownership and, thus, smart financing habits. People with poor credit who are seeking homeownership will want to consider an FHA loan.
Others who have a high debt-to-income ratio, such as graduates who owe a lot of money in student loans, may also want to consider the FHA loan. The debt-to-income ratio is a good way for you and for lenders to assess your overall financial situation, and typically lenders prefer lower ratios. But because the FHA loan is insured, lenders are able to take on borrowers with higher ratios.
As a general guideline, the FHA loan is ideal for anyone looking to finance more than 80% of the purchase price or appraised value of their home.
FHA Loans with David Jacobson
If you’re unsure whether an FHA loan is the right choice for you, please feel free to contact me. I am available by email and phone, and I’m happy to help you make the right decision for your future. I’ve been working in residential real estate financing for over 25 years, and I can make your lending experience effortless.