The Federal Housing Administration (FHA) is the responsible agency in the US for providing mortgage insurance to lenders that meet FHA requirements. The insurance is to protect them against potential losses in case a borrower defaults or claims of bankruptcy. The FHA itself does not make out loans but only insures them. FHA is the largest insurer of real estate mortgages in the world.

Purpose

FHA loans are designed to promote ownership of real estate. By giving a guarantee to lenders, the FHA enables them to make larger loans to individuals at lower down payments, which they would otherwise be unwilling to do.

Most people believe that you need at least 20% as a down payment to get a loan. This is not true. If you meet the FHA requirements you can start as low as a 3.5% down payment. However, if you have the money to put down more cash up front, that is generally better in the long run. The rule is, the lower your down payment and longer the term of the loan will eventually cost you a lot more interest when paying it back.

Assumable FHA loans are transferrable loans which allow another buyer to pick up from where you left off in case you are unable to continue with your monthly payments. Always ask your lender for this option.

The FHA also insures loans taken out for the purpose of home improvements and renovations.

How do you qualify for an FHA Loan?

It is relatively easier to get an FHA loan, but individual lenders can choose to set their own standards that might be tighter than the FHA requirements. What this means is that if one lender is giving you a hard time, you might want to try a different one.

Income requirements - There is no minimum income requirement. Since these are geared towards people belonging to lower to middle income brackets. All you need to show is that you are able to pay back the loan and meet the debt ratio guidelines. 

Debt to income ratio - You need to have a reasonable debt to income ratio. You’ll have to pay other debts such as student loans and car loans along with your mortgage payments. Most lenders approve a 45% debt to income ratio. If you are a good candidate, it can go as high as 55%.

Credit score requirement - Generally most banks are looking for an average credit score of 620.  However, lower credit scores are considered depending on circumstances and the lender. 

Loan amounts - Loans are limited to your affordability, and the regulated purchase prices in your area. 

Why does the FHA insure loans?

The FHA charges the buyers a fee upfront known as mortgage insurance premium (MIP) of 1.75% along with a monthly payment. In case the borrower defaults, the FHA uses these funds to compensate the lending party.

Why FHA loans might not be for you?

It is difficult to get the FHA to approve larger loans. They are sufficient for first time homeowners, but not to build more real estate. Also, sometimes MIPs can cost more in total than conventional loans.

Always compare offers from different lenders before making your decision or just call Forty Acres Lending at 512.582.7878 to get the perfect house financing solutions.