If you are considering buying a home, it is worth it to see if you qualify for a Federal Housing Loan Administration.
FHA is an agency of the US Department of Housing and Urban Development (HUD). The FHA mortgage loans are desirable for those looking to buy a home, due to the low drop in payments and less stringent credit standards.
CALCULATOR: What can I afford?
- Here’s what you need to know.
- The definition of FHA Mortgage Loans
The FHA helps people become homeowners through mortgage insurance, called FHA loans. Loan insurance protects the lender from loss in the case of a borrower to repay the mortgage loan. As a result, FHA loans are available with low payouts and low closing costs.
Most major banks and many mortgage brokers are FHA approved.
The advantages of FHA Mortgage Loans
The FHA loans are highly desirable, especially with first-time home buyers and people with credit ratings, due to a number of benefits that are often not available with traditional mortgage products:
Easy Qualification – A low credit score is often a significant barrier to obtaining a traditional mortgage. The FHA loan requirements include lower qualifying standards, so that even if your credit history is low, you may still be able to get the money you need. Even if you have filed for bankruptcy in the last few years, you can still qualify for an AFH loan, especially if you have reestablished good credit since.
Competitive Rates – For borrowers with bad credit ratings, it is often difficult to obtain competitive interest rates. Subprime, borrowers often pay much more on this loan than borrowers with a better credit score. The FHA are willing to keep interest rates low to make buying a home as affordable as possible.
Low mortgage fees incur other fees, such as closing costs and mortgage insurance. The FHA loans keep these costs down.
The FHA loan requirements involving credit
Your FICO credit rating determines your eligibility for an AFH loan as well as the size of the down payment.
FICO understanding scores
Fair Isaac Corp. created the FICO credit score to assess credit risk. The score takes into account all aspects of your credit history, including your payment history, the amount of debt and the length of your credit history, and generates a three-digit number, ranging from 300 to 850. The higher numbers represent a stronger credit history, making it more likely that lenders are willing to extend credit.
How FICO scores affect your FHA loan
You must have a FICO score of at least 500 to qualify for an AFH loan. If you’re FICO score is 500 to 579, your payment on the loan is 10 percent of the loan.
If you’re FICO score is 580 or higher, your down payment is only 3.5 percent. If your credit score is less than 580, it may be more cost effective to take the necessary steps to improve your score before taking the loan, rather than putting money into a larger down payment.
Your payment must come from an acceptable source, such as your personal savings, another loan, or a gift. It is not possible to obtain the payment of the deposit of someone who could benefit from the transaction, such as an agent or a lender.
Additional FHA Loan Requirements
In addition to a FICO score of at least 500, there are several other requirements:
You must provide the income documents. By law, the lender must ensure your ability to keep up with the payments on your mortgage. To prove your income, you need to provide documents such as pay stubs and tax returns.
You need to have a clear idea of the situation on the Interactive Reporting System Audit Alert (or CAIVRS). CAIVRS is a database containing everyone’s contact information that has been missing on government loans or has tax arrears and federal debt. If you are in the database, you are not eligible for an AFH loan until it is cleared.
You must use the loan for the purchase of a principal residence. The FHA mortgage loans are designed specifically to help people become homeowners. You cannot use these FHA mortgage loans for the purchase of a holiday home or a second home.
The FHA loans represent the best option for many people to prevent their dream of becoming a homeowner from becoming a nightmare.
Qualification requirements are lenient, down payments are low and rates are competitive. To improve your chances of qualifying, make sure you maintain a good credit rating by settling the debt, while keeping your balance on your credit cards low and paying your taxes on time.