FHA loans help those with higher debt-to-income ratios or low incomes buy homes. Specific qualifications apply, and homebuyers must understand the application process to proceed with as few hiccups as possible.
FHA stands for Federal Housing Administration. This type of loan is ideal for first-time homebuyers and has historically been a way for low-income borrowers to obtain homeownership. The United States government insures FHA loans and requires lower down payments than traditional mortgage lenders. Learn more about FHA loans before applying to ensure you meet the qualifications.
FHA guidelines can change occasionally, but the most recent include the following:
FHA loans backed by the federal government offer many advantages over traditional mortgage loans, allowing more people to qualify for homeownership. The benefits to borrowers include the following:
Some traditional mortgage lenders require borrowers to have credit scores of 700 or higher. FHA loans allow for more leniency with the FICO credit score. You can obtain approval with a score as low as 500.
Lenders look at the amount of debt borrowers owe versus their income to determine the level of lending risk. Most traditional lenders want debt-to-income ratios of 36% or less. FHA lenders will accept borrowers with a 43% ratio.
Most borrowers seek FHA loans because of the less stringent requirements, but another advantage exists. FHA loans typically offer lower interest rates, which can save borrowers thousands over the life of their loans.
Refinancing is much easier with FHA loans than with traditional mortgage loans. The Federal Housing Administration offers the FHA Streamline Refinance program, which does not require income documentation, a minimum credit score, or an appraisal. Specific requirements apply, so speaking with an FHA lender regarding the details is essential.
Applying for an FHA loan versus a traditional one is much less stressful for most borrowers. There are a few steps to securing one of these loans.
Reviewing the FHA requirements above and checking the government website for any changes is essential. Obtain all documentation to prepare for the application process to avoid delays.
Shop for multiple FHA lenders and seek pre-approval to understand the options. Compare the location, customer service, and other services the lenders offer.
Begin shopping for a home as a primary residence. Remember that borrowers must move into the home within 60 days of loan closing. Get an FHA appraisal to ensure the house meets the FHA requirements.
Finalizing the loan terms is a critical step. You must sign all applicable documents and pay the closing costs. Closing an FHA loan can take 30 to 60 days.
Borrowers with less-than-perfect credit or higher debt-to-income ratios may want to consider an FHA loan to purchase a home for their primary residence. These loans offer more options and straightforward terms, making the homebuying process less stressful.
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