What is an FHA Loan? – Tips
When you start shopping for a mortgage, the number of types available can almost be overwhelming. If you have gone through a bankruptcy or foreclosure or if you don’t have a lot saved for a down payment, one option to explore is an FHA loan.
What Is an FHA Loan?FHA loans are backed by the Federal Housing Authority. The program was established in the 1930s in response to the massive number of foreclosures that occurred during the Depression. The guaranteed loans meant that lending was less risky for banks and mortgages more accessible. Since the loans are backed by the federal government, they are less risky for lenders. These loans can be a good match for people who have recently gone through credit repair. They require lower down payments and even people who have had serious credit issues such and bankruptcies and foreclosures can be approved.
What Are the Benefits of an FHA Loan?An FHA loan requires only a 3.5% down payment. The money for the down payment can be a gift from a friend or relative, which can be a boon to young first-time buyers. FHA loans are often available even to people who have had bankruptcies or other credit issues. Another interesting benefit of an FHA loan is that it is an assumable loan. What that means is that, when selling a house, the next owner can simply pick up payments where the last owner left off. This can make the house more desirable to buyers if you ever choose to sell.
Are There Drawbacks to an FHA Loan?While FHA loans have a lot of qualities that make them an attractive home purchase option, there is also one big potential drawback to this sort of loan. Because an FHA loan has more lax requirements, it comes with hefty insurance payments. To get an FHA loan, you’ll need two types of insurance. The first is an upfront mortgage insurance premium (MIP) that is equal to 1.75% of the mortgage. This is either paid at closing or can be added to the loan amount. The second is an annual mortgage insurance premium which is paid monthly. The cost of this insurance varies depending on the term of the loan and how much you are borrowing. Do You Qualify for FHA? FHA borrowers have to meet a number of requirements. Some are very rigid, but others can be worked around if the lender has justification. A few key qualifiers:
- You must be over the legal age to sign a mortgage in your state and have a valid Social Security card.
- You must be steadily employed. For the FHA, this usually means that you have been with the same employer for two years or more or that there are no gaps in your work history.
- To qualify for the 3.5% down payment, you need to have a credit score of 580 or better.
- You need to be two years out of bankruptcy and three years out of foreclosure.