What is an FHA loan?
An FHA loan is a type of mortgage insured by the Federal Housing Administration. It is backed by government funds, and is available to buyers throughout the United States. Whether you are looking to purchase your first house or you are a current homeowner, you may be eligible for this federal mortgage program.
The FHA mortgage was created to provide Americans with the opportunity to buy houses without making hefty down payments and incurring expensive closing costs. Most buyers do not readily have the funds to purchase a home outright, which is why they secure mortgages to help pay for their houses. A mortgage is a loan provided by a bank or another creditor to help buyers finance a house. In turn, the bank or creditor charges interest for supplying the buyer with these funds.
FHA financing works just the same, but varies in the interest rate specifics and requirements. Homebuyers looking to secure a loan from the Federal Housing Administration generally pay less up-front from those with conventional mortgages. When comparing FHA loans to conventional mortgages, conventional mortgages refer to those funded by private lenders and other banking institutions which require traditional down payment percentages.
How FHA Loans Work
If you are wondering, “How do FHA loans work?” you are not alone. Many homebuyers miss out on the opportunity to purchase a home simply because they are not aware of the program. FHA loans are provided by approved mortgage lenders throughout the United States. The Federal Housing Administration determines which lenders are qualified to offer these mortgages. Once you find an approved lender in your area, you can meet in person or apply for the mortgage online.
Before you are approved for the loan, you must be sure that you have the necessary funds. While an FHA home loan is generally more affordable than a conventional mortgage, you must still have the money to make a down payment and pay for the insurance. FHA down payments are far less costly than traditional mortgage down payments. In turn, however, you must provide proof of having mortgage insurance.
FHA mortgage insurance can be a bit pricey, and only adds to your monthly expenses. Insurance rates vary, depending on your credit and where you live. The insurance requirement helps protect lenders in the event you default on your loan.
There are two FHA loan mortgage insurance types: upfront and monthly. An upfront insurance premium can either be financed or paid out-of-pocket. It is a percentage of the cost of the home loan, and must be paid – regardless of credit score. Monthly insurance premiums are figured into monthly mortgage payments. This amount varies based on several factors, such as the amount of the loan and the timeline for paying it off. For more information about mortgage insurance premiums, download our comprehensive guide.
FHA Loan Requirements
Before receiving a loan, FHA mortgage requirements ask that all buyers provide certain documents, in order to qualify. For example, you must provide proof of meeting the specific credit requirements. Your credit score helps determine your down payment obligation. Additionally, to get an FHA loan, you must show proof of employment for the previous two years. Some of the documents you may be asked to provide include:
- Proof of residence: Utility bills or other pieces of mail.
- Proof of employment: Paystubs or letters from employers.
- Proof of income: W2 forms or income tax forms.
To receive an FHA insured loan, you must also meet the income requirements. You must have a front-end ratio that falls below a designated percentage. This ratio consists of your monthly income, divided into your monthly housing expenses. Likewise, your back-end ratio (the amount of debt you currently hold, divided by your monthly income) must also fall below the specified percentage.
This information is used during the loan from FHA application process to determine if you meet the qualifications. Before applying, you may be able to get pre-approved. This pre-approval process helps save you time and effort by notifying you if your income, employment history and credit history prohibit you from receiving this type of mortgage.
After applying for the FHA loan, you must get the property appraised. This is a complete inspection of the home and property performed by an approved appraiser. As the borrower, you are not allowed to order the appraisal; only the lender with whom you applied may order an appraisal on the home.
The primary reason for appraising the property is to determine its current market value, in order to confirm that it falls below the loan limits. Along with the home, itself, the appraiser verifies the market value of other homes around the property. The inspection is also performed to ensure that it complies with all health and safety regulations. The appraisal is not free; lenders factor the cost of this inspection into the fees and other expenditures reflected in the closing costs.
Loan Timelines and Terms
The borrowing term for FHA government loans also differs slightly from traditional mortgages. Most lenders offer either 15- or 30-year mortgages through this program. Traditional loans offer a bit more flexibility in terms of timeline. Likewise, the FHA loan interest rates vary between these two types of mortgages.
Not all lenders offer the same rates and borrowing terms. It is important that borrowers understand all the specifics of the loan from FHA before accepting it, as they will be responsible for paying off the loan, according to the lender’s policies. To learn more about the differences between conventional and FHA mortgages, be sure to download our informative guide.
Stipulations for FHA Loans
There may be certain additional FHA loan stipulations for extenuating circumstances. For example, those who file for bankruptcy are required to wait a certain amount of time before applying for – and receiving a – loan from the Federal Housing Administration. Likewise, homeowners who file for foreclosure must also wait to apply for a loan.
Some lenders may waive these stipulations, just as they may make exceptions for some applicants with credit scores below the designated amount. However, it is ultimately up to the borrower to understand all of the specific details before learning how to get an FHA loan.
What Are FHA Loans?
The Federal Housing Authority (FHA) insures mortgages and approved lenders to offer mortgages to eligible borrowers. Although available to all home buyers, the requirements of the loan make it attractive for first-time buyers. FHA-approved mortgages typically allow buyers to provide a smaller down payment and apply with a lower credit score than standard home loans. FHA loans covers many needs, including energy efficiency repairs and mobile home financing. Find out about FHA loan benefits in our guide.
Who Is Eligible For An FHA Loan?
If you are interested in getting a home loan through an FHA-approved lender, you must meet program requirements. The most important factor is choosing a mortgage provider approved by the FHA. Employment history is another crucial eligibility factor, as lenders will require proof of employment for the previous two years. Lenders will review your potential expenses, lending histories and your current debts to determine if you can pay your mortgage. Find out more about FHA loan eligibility by downloading our guide today.