From what the name suggests, an FHA loan is a mortgage insured by the Federal Housing Administration (FHA). This can be issued by any supporting lender across the country, provided that they have been FHA-approved. The FHA was established by the Congress in 1934, in an effort to aid lower-income households to successfully obtain mortgage loans.
Loans were initially designed for those who had higher incomes, so anyone who earned less than the average often has trouble succeeding in applications. Prior to the establishment of FHA, a downpayment of 50% for properties was also common, which ended up being under short-term balloon mortgages that were impractical.
Today, FHA serves millions of potential homeowners all over the country, now given the chance to buy or refinance homes. Other types of FHA loans also allow applicants to receive financing for new constructions, as well as renovations for already existing homes.
If you wish to know more about FHA loans and how to qualify for it, this quick guide is for you. Let’s start!
How do I qualify for an FHA loan?
Before anything else, it’s important to reiterate that the Federal Housing Administration isn’t responsible for lending you money for a mortgage. They exist as an institution instead, as you will only be able to apply for loans from an FHA-approved lender.
This FHA lender can either be a bank or an independent lending company, and the FHA merely steps in to guarantee the loan. To become eligible for an FHA loan, however, a borrower must meet the following qualifications:
- FICO score: An individual’s FICO score must be at 500 to 579 with 10 percent down. A FICO score of 580 or higher is also considered, provided that it comes with 3.5 percent down.
- Employment history: The borrower should also have a verifiable employment history, which should be traceable for the last two years.
- Income: The individual should also prove that they can afford the loan through an income, proved through bank statements, pay stubs, and federal tax returns.
- Primary residence: All loans must be under the primary residence.
- Front-end debt ratio: Monthly mortgage payments should not exceed 31 percent of the total monthly income.
- Back-end debt ratio: Mortgage, coupled with other monthly debt payments, should not exceed 43 percent of total monthly income.
Note: People who have undergone bankruptcy can still be allowed to qualify for an FHA loan, as with those who have experienced foreclosure. If the borrower has experienced bankruptcy, he/she will be required to wait for up to 2 years before applying. A foreclosure, on the other hand, requires up to three years of waiting time.
Why should I get an FHA loan?
1 – Low down payment and less strict credit scores
An FHA loan has been regarded as one of the easiest types of mortgage financing. Qualifications can be easily obtained, as it only requires a low down payment. As previously stated, a down payment of 3.5 percent is enough for maximum financing.
People with less than perfect credit are also considered. Those with credit scores that go as low as 500 still end up with approvals. Due to this, FHA loans are generally considered as some of the best ways to achieve their dream homes.
2 – Assumable mortgage
This is considered as another advantage of FHA loans, as an assumable mortgage greatly benefits house sellers. In other words, if you wish to sell your home, the buyer can “assume” the existing loan you have.
The Bottom Line
While the benefits of an FHA loan is undeniable, it’s not for everyone. There are other options for people with credit scores way below 500, as with personal loans for people who suffer from extremely bad credit.
Other homeowners also express the desire for a conventional mortgage instead, but others still stand by what the FHA loans offer. In the end, the choice of applying for an FHA loan depends entirely on you and your current situation.
If you wish to apply for a mortgage loan in California but have no idea where to begin, Lend LA is here to help you! With cutting edge technology and a strong commitment to customer service and satisfaction, we’ll help you achieve your dream home!