An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). Many first-time homebuyers choose FHA loans because they can’t qualify for conventional financing due to credit issues or a lack of down payment savings.
The FHA has helped millions of renters become homeowners since 1934, by insuring mortgages offered by FHA-approved lenders. The insurance allows lenders to make loans to borrowers with less-than-perfect finances, and recoup the lenders’ losses if a borrower can’t repay the loan.
Here are six basic steps to follow to apply for an FHA loan:
Before you fill out an FHA loan application, learn about some key FHA loan requirements so you can decide if an FHA loan is right for you.
Any borrower who meets FHA loan requirements can qualify for an FHA loan, but they must apply through an FHA-approved lender.
Borrowers pay two types of mandatory FHA mortgage insurance premiums. The first is a lump-sum upfront mortgage insurance premium (UFMIP) charge equal to 1.75% of your loan amount. UFMIP is typically financed into the loan amount. The annual mortgage insurance premium (MIP) ranges from 0.45% to 1.05% of the loan amount, and is divided by 12 and added to your monthly payment.
Yes, so long as two years have passed since a Chapter 7 bankruptcy, or you’ve made 12 months of on-time payments on a Chapter 13 bankruptcy plan.
Some of the biggest benefits of an FHA loan include qualifying with a credit score as low as 500, a low down payment minimum, a DTI ratio above 50% and the flexibility to add a co-borrower’s income to get approved even if the person won’t live in the home.
A major drawback of FHA loans is the high cost of FHA mortgage insurance, which must be paid for the life of the loan if you put the minimum 3.5% down. FHA county loan limits also curtail your buying power since they’re set at 35% below conforming conventional loan limits in most counties in the U.S.
FHA loan rules aren’t as flexible as conventional loan guidelines when you apply for a mortgage with student loan debt. Most FHA-approved lenders use 1% of your outstanding balance as your effective monthly student loan payment — even if you have a repayment plan that shows a lower payment. In contrast, conventional lenders use the amount shown on your credit report or loan paperwork, which could help you buy a more expensive home than an FHA loan allows.
Yes. FHA-approved lenders can preapprove you for an FHA loan after reviewing your income, down payment cash, credit score and credit payment history.