Understanding FHA Loans and Determining If This Type of Loan Is Right For You
What Is An FHA Loan?
An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA). These loans are typically popular for first time home buyers given that they allow a down payment of 3.5% with a credit score as low as 500. FHA Loans are designed for low to moderate income borrowers who cannot afford a large down payment.
Since 2018, a borrower can borrow up to 96.5% of the total value of the home, if their credit score is at least 580. If the score is below a 580, a 10% down payment of the value of the home is required. However, 3.5% of the down payment may come from a grant or gift.
A Glimpse Into the History of FHA Loans
During the 1930s, FHA Loans were introduced as a result of the Great Depression. During this time, foreclosures were escalating and the government needed to create a solution for the defaulting housing market. Federal mortgages were introduced to allow potential home buyers the ability to purchase a home they otherwise would not qualify for through existing loans. Prior to FHA loans, most loans were short-term, lasting between three to five years.
The Federal Housing Administration was created as part of the National Housing Act of 1934, which was designed to stop bank foreclosures on family homes. Its primary goal was to regulate the interest and terms of mortgages. As a result, these new practices increased the number of people who could afford a down payment as well as a monthly payment to their lender. Since 1934, the FHA has insured over 34 million home mortgages and counting.
Do I Qualify For This Type of Loan? Basic Requirements
Since FHA loans are designed for low-income individuals with a 500 or below credit score, most first-time buyers or those without a credit score have no problems qualifying for an FHA loan.
- If you have a credit score between 500-579, you are required to pay a down payment of 10%.
- If you have a credit score higher than 580, you can put a down payment as low as 3.5%.
- The FHA does not directly loan the borrower the money. The borrower pays a monthly or annual mortgage premium.
- A steady employment history is necessary or the borrower must have worked at the same place for two consecutive years.
- Borrowers must be two years out of bankruptcy with a newly established good credit of the minimum 500 score, some lenders allow one.
- The property should meet certain criteria set by the appraisal. Sellers would also need to agree to required repairs.
The Pros and Cons of FHA Loans — Other Facts To Consider
Since the Great Depression, FHA mortgages have had success among first time buyers considering most have a small amount of cash, equity, or low credit score. In 2018, first-time buyers are still reaping the same benefits. While there are substantial reasons to consider applying for this type of loan, there are a number of benefits and drawbacks to consider.
These are the primary benefits:
- Laid-back credit score requirement. Your circumstances will be considered if you have a credit score lower than 500.
- Low down payment. Unless you’re searching for a home in a rural area or are a military veteran, this loan will require the smallest down payment.
- Large allowance for closing cost financing. Closing costs are often expensive. In these situations, a seller may help cover the closing cost expenses.
Now for some drawbacks:
- Minimum property requirements. The FHA has three property requirements that must meet their standards of safety, security, and soundness. This means that if the property doesn’t meet standards, repairs must be made.
- Loan limitations. Typically, an FHA loan makes the most sense in lower cost areas since the loan amount may not be as large.
- Mortgage insurance. This tends to be the biggest drawback but it’s not a huge problem. Since these loans work like insurance, an upfront and monthly premium for the mortgage that exceeds 80 percent of the home’s value will be required. There are variations to this but the idea is to prevent foreclosure.
The Bottom Line — Is An FHA Loan For You?
If you’re a first-time buyer, have a low credit score, and can only afford a small down payment, then an FHA loan may be right for you. Homeownership can help you avoid inflating rent costs and establish a sense of social stability. Down the road, you will be in a much better position having taken this step as opposed to continuing to pay fluctuating rent prices.
Contact Us Today To Learn More
My Home Loans in El Paso is committed to finding home buyers the right loan so they can achieve their goal of becoming a homeowner. Please connect with us today if you are interested in learning more about an FHA Loan. We can help answer your initial questions and guide you in the right direction.