FHA Home Loans: What Are They and How to Get Them

The time has finally arrived. Your finances are in order; you are in control of your credit card debt, your student loans are manageable, and you are saving for a home of your own. The hard part may be over, but you have important decisions to make. How much house can you afford? How much money will you need for a down payment? What additional fees should you expect? How will you possibly save what you need on top of the everyday costs of living?

A house is a huge investment, and you need to consider all the options and opportunities available. One opportunity to look into is Federal Housing Administration (FHA) loans, which offer flexible terms and low down payments. An FHA loan may let you become a homeowner sooner than you originally thought possible.

Basics
The Federal Housing Administration (FHA) does not lend money directly. Private lenders make the loans, and the FHA provides insurance, protecting the lender from the risk of default. Borrowers are required to purchase mortgage insurance. The insurance may seem like an unnecessary cost, but it gives lenders the confidence to offer flexible approval criteria, reasonable interest rates without perfect credit, and a down payment as low as 3.5 percent.

Advantages
FHA loans offer an impressive level of flexibility, and qualified borrowers will find multiple pathways to homeownership. One major advantage is that student debt that has been on deferment for twelve months or more is not included in the assessment of the buyer's debt-to-income ratio. This ratio, in general, is more flexible with FHA loans. Where traditional mortgages require borrowers to spend no more than 45 percent of their monthly income on housing, FHA borrowers can push this ratio to 50 percent or even higher.

The options go on. If you are considering a multi-unit property, only two lines of credit are required to apply. Even a three-year-old foreclosure or two-year-old bankruptcy does not automatically disqualify you. If you have a more recent foreclosure or bankruptcy, you could still give the application process a shot. Loan officers have considerable latitude, and borrowers with extenuating circumstances may receive special consideration.

Reasonable Interest Rates without Perfect Credit
Interest rates vary according to your credit score, as lenders attempt to mediate the risk of a potential default. Mortgage insurance reduces the risk of default and encourages lenders to offer affordable rates to borrowers without perfect credit. Borrowers do need to consider the additional cost of mortgage insurance. Annual insurance prices between 0.45 and 0.85 percent for a loan value of less than 400,000 and a 1.75 percent upfront fee. Many borrowers with average to below average credit scores find that even with this additional expense they save money with the advantageous terms offered by FHA loans. If you have excellent credit and the means to finance a 5 percent down payment, you may be able to get a better deal elsewhere.

Low Down Payments
FHA loans offer unusually low down payment rates. The cost of living has outstripped salaries, and many Americans simply cannot save the tens of thousands of dollars necessary to secure a traditional mortgage. Your down payment can be as low as 3.5 percent of the total purchase price. This low rate does depend on your credit score, and if you have a score lower than 580, FHA loans require a down payment of 10 percent. Still, earning a higher credit score is often a more realistic goal than saving an extra 6.5 percent of your home's value. As soon as you start thinking about homeownership, start taking an active role in managing your credit score, no matter what kind of loan you plan to get.

In addition to the low down payment, the program allows parents, employers, or others to provide this money as a gift. Few loan programs have such lenient standards.

Eligibility
Borrowers must have a credit score of 500 to qualify for a down payment of 10 percent. A credit score of 580 or higher qualifies borrowers for the minimum down payment of 3.5 percent. Borrowers must also show job stability, indicated by steady employment, preferably with the same employer for two years or more. They must also intend to live in the home they are purchasing. If you can show two years of reliable, credit-worthy financial dealings, your application will be considered.

How to Apply
You can fill out a simple online form at the FHA website to pre-qualify. A specialist will contact you to go over the details of the full application. You should be prepared to provide ample information, including your residence for the past two years, employment history, and income history. Remember to read everything carefully before you sign anything. If you have questions, ask.

Is an FHA loan is right for you? You need to consider several factors. This program serves people with mediocre credit who cannot afford a high down payment. If these conditions do not apply in your case, the fee for the mortgage insurance may mean that the FHA option would give you higher payments overall. FHA loans are intended for a particular segment of the population, and if you are in that segment, they are a great option. If you are not in that segment, you may be better off with a conventional mortgage. Be sure to compare and look into several options before signing the dotted line. Happy house hunting!