When the economy is poor and your credit score is less than satisfactory, it is important to know that you are still able to buy a home - the beginning to a sound investment and the ending to the renting lifestyle. Through the FHA, you are able to apply for a home loan requiring a low down payment and providing aid without discriminating based on location or credit score.
FHA Loan Basics
Federal Housing Administration loans, or FHA loans, were introduced in 1965 when the Department of Housing and Urban Development was formed. These loans allow a first-time home buyer to obtain a loan to purchase the home. Although most FHA loan borrowers are first-time home buyers, the loans are available to anyone, regardless of how many homes the borrower has purchased. These borrowers typically do not qualify for any other home loans due to various factors, including having a poor credit score.
Thanks to FHA loans, they can
acquire a home loan since their risk is removed when the FHA insures the loan for the lender. This allows the lender to be more willing to provide a loan to the borrower since if the borrower fails to make payments on the home, the FHA’s insurance will cover losses to the lender.
FHA home loans are assumable. This means that the borrower can take over the mortgage without having to assume additional costs of obtaining a new loan. Although the lender needs to pay a portion of the closing costs, the borrower’s allowable costs can be wrapped in the loan. FHA rates can change, but generally lie between 4% and 8%.
Guidelines to FHA Loans
The required down payment for a FHA loan is extremely low: only 3% of the home’s value. Whereas many lenders require the down payment to be at least 10% or require at least 20% without the purchase of mortgage protection insurance, the FHA loan’s required down payment stays within the 3% range.
You must send an underwriter, the person who approves or denies your request for a FHA loan, a list of information in order to be approved. The required information includes the following:
- Social Security number
- Addresses of all residences within the past two years
- Names of all employers within the past two years
- Bank information, including account numbers and balances on all accounts
- Current gross monthly salary
- Estimated value of personal property, including furniture
- Tax information, including W2s and current paycheck stubs
- Proof of enrollment in a university (if you are a student applying for a FHA loan)
- Verification of student loans (if you are a student applying for a FHA loan)
- Certificate of Eligibility and DD-214 (if you are a Veteran applying for a FHA loan)
Limits to FHA Loans
Amounts for FHA mortgages depend on the location where you are applying for the mortgage loan, and these amounts are often referred to as FHA limits. FHA limits range from $270,000 to $730,000 in order to cover all homebuyers in every metropolitan. Although there is a large range between the lower and upper limits, the location determines the limit for the homebuyer.
For example, in California mortgage market where the housing market prices are steep and where there are extremely-high cost homes, the loan limit will be closer to the upper limit. In rural Georgia where the price of a home may be only a quarter of the cost of a home in California, the loan limit will be closer to the lower limit. This allows people who live in each metropolitan community and state to be able to afford a home, even when the home prices change dramatically from state to state.
FHA loans are great for home buyers who cannot afford a new home or who have a poor credit score to still be able to purchase a home without having to settle for a bad credit mortgage loan. The FHA aims to help potential homeowners in every metropolitan setting so that no one can be denied a home just because finances may not be in the best condition.