Do you plan on getting an FHA loan? An FHA loan is a government-backed mortgage that is insured by the Federal Housing Administration. It is very popular among first-time homebuyers due to its low down payments and minimum required credit scores.
Typically, the government issues the loans, but it is offered by FHA-approved mortgage lenders. If you are a first-time home buyer, it is best to get this since you don’t need to present a high credit score like other options on the market. To know more about FHA loans, read our guide below:
What is an FHA loan, and how does it work?
FHA allows borrowers who do not have enough cash savings or high income to purchase a home. Many lenders also have certain guidelines or high credit scores as part of their requirements. With these loans, they allow people with low credit scores or those who don’t have a perfect credit track to borrow from them.
Of course, there is a catch to this generous offer. You will need to pay FHA mortgage insurance because it protects the lender from a loss if they default on the loan. Usually, mortgage insurance is required when you only paid less than 20 percent of the loan amount.
There are two mortgage premiums you have to pay. The upfront mortgage insurance premium is 1.75 percent of the loan amount, and it is paid when the borrower gets the loan. The annual mortgage insurance premium is estimated to be between 0.45 percent and 1.05 percent, depending on the loan term (15 years or 30 years), the loan amount, and the initial loan-to-value (LTV) ratio.
Your FHA mortgage insurance premiums will only be canceled after 11 years, but that is if you are able to finance 90 percent or less of the property’s value and stay current with payments. Lenders are also limited to charging no more than 3 percent to 5 percent of the loan amount in closing costs. It is no wonder that FHA loans are popular with first-time homebuyers and those with low to moderate incomes. Keep in mind that you can get an FHA loan as long as you are using it to buy a primary residence.
Requirements for getting an FHA loan
To be eligible for an FHA loan, you must meet the following lending guidelines:
- The loan should be used for a primary residence.
- You must present a legit employment history for the last two years.
- Your income must be verifiable through pay stubs, federal tax returns, and bank statements.
- You must have a FICO score of 500 to 579 with 10 percent down or a FICO score of 580 or higher with 3.5 percent down.
- The property must be appraised by an FHA-approved appraiser and meet HUD property guidelines.
- Your front-end debt ratio (monthly mortgage payments) should not exceed 31 percent of your gross monthly income.
- Your back-end debt ratio (mortgage, plus all monthly debt payments) should not exceed 43 percent of your gross monthly income. Lenders may allow a ratio of up to 50 percent in some cases.
At this point, you now know that FHA loans are an excellent solution for first-time borrowers who are looking for a new home. There is still a lot you need to learn about FHA loans, so it’s best to talk with your lender. They can give you a detailed guide on the steps you need to take and their requirements once you are given the loan.
Are you looking for reliable mortgage loans in Dallas? New Frontier Financial Inc. is a full-service Mortgage Broker Service. We are excited to help you achieve your goal to purchase or refinance a home or invest in Texas real estate. Contact us today at (469) 886-8300 to see how we can help!