FHA loans are guaranteed by the U.S. Federal Housing Administration (FHA). This type of loan is usually given by credit unions and private lenders. If you aren’t able to repay your loan, and FHA will provide backing to pay the lender. It offers mortgage insurance to lenders. It’s because of this that many lenders will offer substantial mortgages for those who would normally not be able to get a loan.
FHA was created during the Great Depression in 1934 when housing markets were struggling due to many people being unable to meet the criteria for a home mortgage.
An FHA loan is an alternative for people looking to buy a home, but unable to get a loan from a conventional lender. This type of loan may not be for everyone, however, they do offer some benefits. An FHA loan will:
- Allow you to make down payments as low as 3.5%
- Give you the ability to be approved, even with issues in your credit history or having low credit.
- Allow you to purchase manufactured homes, condominiums, single-family homes, and multi-unit properties that are backed by the FHA.
- Receive extra funding for repairs and renovations using an FHA 203k program. The funding can go above your purchase loan as well.
- Allow you to fund your downpayment with either help from the seller or gift money.
- There are no prepayment penalties.
Qualifications for an FHA Loan
In comparison to conventional loans, FHA loans tend to be easier to qualify for. These loans are accessible to all levels of income. Keep in mind that some lenders will set their qualification standards higher than the minimum requirements of an FHA. It’s best to check with several FHA-approved lenders.
There is no minimum income that is required for an FHA loan. All you need to show is that you are able to repay the loan. FHA loans are more focused on borrowers with a low income, but you won’t be disqualified if you are in a higher income bracket. However, there may be some first-time buyer programs that you may not qualify for with a higher income.
On qualification that you need to meet for an FHA loan is a decent debt-to-income (D/I) ratio. This means that your monthly loan payments need to by comparatively lower than your monthly income.
A good D/I ratio should be 31/43. This doesn’t mean that you won’t qualify if your D/I ratio is higher.
You are more likely to be approved for an FHA loan if you have a low credit score. This is another area that some lenders will set a bit higher than the FHA requirements, so shopping around is advised. Some lenders are willing to do manual underwriting, which will let them look at other areas of your credit history that conventional credit scores don’t consider, such as payment for utility bills.
There are limits that the FHA has regarding how much you can borrow. Modest loan amounts that are proportionate to your areas’ home prices tend to be the limit.
Tip: If you aren’t able to meet the standard criteria for an FHA loan approval, other things can help, such as making a bigger downpayment that will offset your credit history.
It’s always a good idea to shop around when looking for an FHA loan due to different lenders setting different criteria. While you may not get approved by one FHA lender, another will.