It’s everyone’s dream to own a home, and an FHA loan can help you accomplish that goal. An FHA loan is one option to obtain a mortgage that may be the best choice based on your circumstances. These loans help people in the low- or middle-income bracket and that don’t have a lot of money to put down on a house. It’s also ideal for someone with a less-than-perfect credit score. If this sounds like you, then read on for more information on how to move forward with an FHA loan.
What Is an FHA Loan?
A Federal Housing Administration (FHA) loan is a mortgage that is backed by the Federal Housing Administration. In other words, these loans are insured by that entity. These loans can only be administered by lenders who are FHA-approved, and homes you are looking at must accept FHA loans. However, you shouldn’t have much trouble finding plenty of lenders who are FHA-approved and ample housing that accepts an FHA mortgage.
There are several benefits of securing an FHA loan. For one thing, you can get an FHA loan with very little money down. Also, people with less-than-favorable credit are accepted for this type of mortgage.
History of FHA Loans
The Federal Housing Administration (FHA), a part of the Department of Housing and Urban Development (HUD), was established in 1934 by the National Housing Act. The goal of creating the FHA was to ensure people of all income levels would have access to home financing after the Great Depression. It also was created to aid in improving housing standards.
Prior to the FHA mortgage loans, people would have to come up with up 30 to 50 percent down on a house and repay it within 5 to 10 years. This made homeownership nearly impossible for low to moderate-income earners to purchase. By the time couples scraped up enough for the down payment, they would be older and then only be given a short window of time in which to repay the money.
FHA mortgages made the down payment low and extended the repayment time to 20 to 30 years. Now, people who typically wouldn’t be able to come up with the down payment or pay such high monthly payments were able to get into a home. This opened the door for much greater homeownership, and even today, homeownership has increased to 67.9 percent.
FHA Loans Today
Today, the Federal Housing Administration (FHA) still backs mortgage loans for those who need or want them. FHA loans are distributed through a bank, credit union, or other lending institution and can be received with as little as 3.5 percent down, depending on your credit score (more on that later). This allows you to start your dream of homeownership early on in life. You can borrow more than three-quarters of the home’s value and receive terms that are for up to 30 years.
In order to offset the risk associated with providing a home mortgage for zero down, you will need to pay mortgage insurance called Up Front Mortgage Insurance Premium and mortgage insurance premium (MIP). The MIP is usually paid for 11 years of the mortgage and sometimes for the lifetime of the loan. The Up Front Mortgage Insurance Premium is paid at the time of closing and can be rolled into the loan itself.
So, how much is the MIP? The U.S. Department of Housing and Urban Development estimates that the amount is approximately 0.45 percent to 1.05 percent of the loan amount. For example, if your loan was for $250,000, the MIP would range between $1,125 and $2,625.
How to Qualify for an FHA Loan
Qualifying for an FHA loan is easier than some conventional loans. You do need to make sure you are applying for a mortgage that will be used for your primary residence, not a second home, rental, or vacation spot. Also, you must have proof of a secure job with a steady income.
Some people are concerned about their credit score when it comes to borrowing money for a big purchase like a home. However, one of the highlights of an FHA loan is that people with poor, average, or no established credit can still gain access to an FHA loan. The only thing that differs is the amount of down payment you’ll have to pay.
- To get into a home with 3.5 percent down, your score must be 580 or above.
- If your score is between 500 and 579, you must pay 10 percent down.
Another factor that plays a part is your debt-to-income ratio. Your debt-to-income (DTI) ratio can be calculated by adding up all your monthly debt expenses and dividing that amount by your gross monthly income. For example, if your gross monthly income is $4,000 and your debts are $1,000, then the DTI ratio is 25 percent. To be eligible for an FHA loan, your DTI ratio should be below 43 percent.
How to Apply for an FHA Loan
When you apply for an FHA loan, you will need to have several documents on hand to start the process. It’s a good idea to begin gathering these items to facilitate a smoother transaction. Some of the items you may need include the following:
- Proof of U.S. citizenship, legal permanent residency, or eligibility to work in the U.S.
- Social security card
- Two years of tax returns
- Last two pay stubs
- W-2 forms for the last two years
- If self-employed, provide two years of profit and loss statements
- Additional income, such as a pension, Social Security, or disability income
- Bank statements for at least the last 30 days
- Statements on investment securities and earnings
- Listing of all outstanding debts and the minimum monthly payments for each one
- Two years of past employment information, including the names and addresses of employers
Different Types of FHA Loans
There are five different types of FHA loans.
- Basic Home Mortgage Loan 203(b). This involves fixed or adjustable rates for several types of home options.
- 203(k) Rehab Mortgage. This loan is for buying and renovating a home.
- Construction to Permanent (CP) Loan. With this type of loan, you can build a home as well as purchase the land.
- Title I Property Improvement Loan. This loan allows you to purchase a mobile home or fix a home.
- Energy-Efficient Mortgage (EEM). When purchasing a home, you can get energy-efficient upgrades with this loan.
A financial mortgage advisor can assist you in deciding which type of loan is the right one for you.
What Are FHA Loan Limits?
FHA loans have limits on how much you can borrow. Each state’s county has its own limitations, and it also depends on what type of property you’re purchasing. Rhode Island has five counties, which are Bristol, Kent, Newport, Providence, and Washington. For each of these counties, the mortgage limits are the same for a single-family residence. The upper limit (or maximum amount) you can borrow with an FHA loan is $506,000.
Get Started Applying for an FHA Loan
Now that you know more about FHA loans and you think this might be ideal for you, what are your next steps? Where can you go to get started? You can obtain an FHA loan at most banks and other mortgage lending institutions. Of course, every lending institution has different standards, fees, and rates that they may charge, and this can vary significantly from one lender to another. Therefore, it’s critical to check around at different locations to determine the fees and rates. Also, you want to find out what terms the lenders offer you. Oftentimes, the best way to get started with an FHA loan is to get connected with a real estate agent who has experience dealing with these types of loans.
Once you get connected with a real estate agent, they can walk you through the process of getting an FHA loan. There are essentially two ways to apply for an FHA mortgage loan. You can pick up all the necessary documents for the loan at the bank you decide to use. Remember, it must be an FHA-approved lender. Once you have your application papers, you can take them home, fill them out, then submit them to the loan officer for review.
The other option is to go online to apply for an FHA loan. The bank will have a place on their website for FHA loan applicants to submit their applications electronically. You will have to be able to scan all the necessary documents in order to submit the entire thing electronically. Once it is submitted, the loan officer will review it and let you know if you’re missing any pieces.
It may take several days to approve your loan because the bank will need to verify all the documents and run a credit check. However, once you get approved for the FHA loan, you can begin your search. Contact RI Home Store, your friendly realtor, for assistance finding your next home.