If you’re wondering whether an FHA loan is right for you, don’t worry, we’re here to help!
An FHA loan is a type of government-backed loan for borrowers who earn a low to moderate-income. The Federal Housing Administration insures this mortgage, hence the name FHA loan. They are popular among first-time house buyers for a couple of reasons that we’ll highlight later.
If you’re wondering whether an FHA loan is right for you, but you’re having trouble rummaging through the FHA handbook, worry not; we’re here to help. This article will look at everything you need to know about FHA loans. That way, you can make a more informed decision on whether you should apply for an FHA loan.
How Do FHA Loans Work?
FHA loans involve three parties, the borrower, the lender, and the FHA. The borrower pays a minimum of 3.5% down payment to the lender if they have a credit score of 580 or higher. Borrowers with credit scores of between 500 to 579 can still qualify for an FHA loan, but they have to pay a 10% down payment.
The lender can be a bank, credit union, or private lender. All lenders that issue FHA loans must have approval from the FHA to issue these loans. In addition, for any mortgage issued by an FHA-approved lender, the FHA insures it, thus protecting the lender in case of default. That’s why FHA-approved lenders tend to be more lenient with their mortgage terms, even to people who may not have the necessary loan qualifications.
These loans come in either 15 or 30-year repayments terms with fixed interest rates. The only catch is that borrowers must pay the FHA mortgage insurance. This is the same insurance that protects lenders from losses should the borrower fail to repay the mortgage. All FHA loan borrowers must pay two insurance premiums which are:
- Upfront premium – This is 1.75% of the loan amount. The borrower pays for this once they are approved for the loan. In some cases, it can be part of the financed loan amount.
- Annual premium – Borrowers pay 0.45% or 1.05%, depending on a variety of factors. These factors include the loan amount, the loan term, and the loan-to-value ratio or LTV. Your LTV ratio is the loan amount divided by the property’s value expressed as a percentage.
What Makes One Eligible for an FHA Loan?
If you’re looking to apply for an FHA loan, ensure you first meet the following criteria:
- Have proof of employment history for the past two years
- Have a credit score of over 500
- Want financial assistance to finance a primary residence
- Have proof that an FHA-approved appraiser appraised the property in question
Your lender will inform you of any other special requirements for their FHA loan. However, the above are some of the main requirements to qualify for an FHA loan.
Apply for a FHA Loan Today
With flexible terms and plenty of FAH-approved lenders, applying for an FHA loan is never a bad idea. Contact Better Rate Mortgage today, and we’ll get started on your FHA loan.