If you are a first time homebuyer who’s finding it hard to get preapproved for a mortgage, a Federal Housing Administration (FHA) loan might be the option for you. Unlike standard mortgages, FHA loans don’t require an excellent credit score or a high down payment. The loans are guaranteed by the FHA, which gives the lender some peace of mind. In exchange for the guarantee of the FHA, the loans have requirements that traditional mortgages don’t have.
How it’s different
One of the big ways an FHA loan differs from a traditional loan is the size of the down payment. While lenders typically prefer a down payment of 20 percent, or at least 10 percent, an FHA mortgage, requires as little as 3.5 percent. That down payment doesn’t have to come out of your own pocket, either. You can receive the money as a gift from a family member.
You may also be eligible for an FHA mortgage if your credit score is as low as 500. A score between 500 and 579 will mean you have to make a larger down payment of 10 percent, while 3.5 percent down is sufficient if your score is 580 or higher.
What you need
If you think an FHA mortgage is the right option for you, there are a few things you’ll need. First, you want to find a lender that is FHA-approved. The FHA doesn’t make the loans itself, it just guarantees them.
Before approving you for the loan, the lender will verify your income and check your credit. You can qualify for the loan if you’ve filed for bankruptcy, as long as it’s been 2 years since the discharge. You also need to live in the United States and have a Social Security number.
What you can get with it
FHA loans can be used to purchase a single-family home or a multifamily home with up to four units. While there’s no upper income limit on the loan, there is a maximum loan amount. The maximum amount you can borrow depends on where you live and the cost of housing there. For example, if you’re looking for a home in an area with a high housing cost, such as Arlington, Virginia or Washington, D.C., the maximum mortgage amount is $625,500.
Insurance costs
To make up for the lower down payment and lower credit requirements, borrowers need to pay mortgage insurance to the FHA. There are two types of insurance: an upfront mortgage insurance premium and a monthly mortgage insurance premium.
Once you’ve paid off enough a certain amount of the mortgage, you no longer need to pay the insurance premium. You can also refinance the loan sooner to a non-FHA loan to eliminate the insurance.
Image source: Wikimedia Commons
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