If you have a low credit score or minimal downpayment, you may have heard that a government loan is a good option. But how true is that? Here’s what you need to know about FHA loans and whether it’s the right option for you.
GET THE FACTS ABOUT FHA LOANS
As mentioned above, FHA loans are government-backed loans. The Federal Housing Administration (FHA) insures these loans. Because the bank is guaranteed to recoup their money should the borrower default, banks are now able to fund loans at favorable rates to borrowers who are considered “risky.”
So while called an FHA loan, the FHA is not the entity funding the loan –banks are!
FHA loans have more lenient qualification requirements and are available only through FHA lenders. This is also true about FHA refis.
How to Qualify for Loan:
- Minimum qualifying credit score is 580 (lowered in 2016 from 620!)
- Steady work history for the past 2 years
- Social security number and lawfully reside in the US
- 3.5% down payment (and downpayment can be a gift from a family member!)
- Property must be a primary residence
Here’s more interesting facts –Chapter 13 bankruptcy doesn’t automatically disqualify you! If it’s been 2 or more years since the discharge date of the bankruptcy, you can apply for an FHA mortgage.
Is there a catch to Federal Housing Administration?
Not really a catch, but there are some things you need to be aware of. Federal Housing Administration come with a sort of “built-in” mortgage insurance. It’s similar to private mortgage insurance, FHA mortgage insurance is paid in two parts, the first one is upfront as part of your closing costs and the rest is paid monthly as part of your mortgage payment.
However, unlike private mortgage insurance (which can be canceled once you’ve paid the mortgage down to 80% of the appraised value) FHA mortgage insurance lasts the life of the loan.
FHA insurance is often the determining factor on whether an FHA is the right choice for a particular borrower. The monthly FHA mortgage insurance payment can last anywhere from 11 years (if your downpayment is at least 10%) or the entire life of the loan (if you put the minimum of 3.5% down). The end cost can vary depending on the amount of the loan, and sometimes an FHA loan may not be the best loan for you.
But in most cases, where the first-time homebuyer is purchasing a moderately priced home and planning on staying there for at least 5 years, an FHA loan is THE best choice for home financing.
Is an Home Loan Right For YOU?
Whether an FHA or another loan, we’ll match you with a home loan that makes sense for you financially and otherwise. Start the pre-qualifying application located here on our site, and we’ll be in touch soon with personalized, stress-free mortgage guidance.