In the universe of loans, the ones under the Federal Housing Administration stand out to be the kindest. In a country where not everyone has equal footing on finances, home ownership is still made possible thanks to loans backed up by the government.
While there has been plenty of debate over whether or not renting is indeed better, one cannot deny the fact that houses are investments and their value may grow tenfold over time. If you’re in the process of looking at homes and checking loans to accompany them, you might have already stumbled upon the FHA program.
To better understand what FHA loans have to offer, it is important to note that these loans are insured by the federal government. A feature not available to conventional loans. Because of this, FHA loans have less stringent qualifications and are able to accommodate more people with less than impressive credit scores.
To compare, a non-conforming loan may demand a borrower to have a FICO score of at least 620 to 640 before a loan is granted. On the other hand, FHA loans may be granted to people who have a humble FICO score of at least 500. Those who reach a 580 rating are already able to bag a house with only a 3.5% down payment. While those whose credit scores are below that may still qualify but will need to expend a 10% deposit instead.
One of the more obvious differences between conventional and FHA loans is the presence of a mortgage insurance. While both loan types call for this, the FHA requires the borrower to keep paying for it up until the end of the loan; whereas conventional loans only demand for this to be paid for up until a certain amount of the debt.
Because conventional loans are not insured by the government, they are only able to grant loans to people who have credible and proven credit scores. FHA, on the other hand, is more attainable to a wider sea of Joes and Janes, exposing lenders to more risk as borrowers under this loan program have higher chances of defaulting. Hence, the purpose of the mortgage insurance is to protect the lender.
On a positive note, FHA loans allow for 100% of the down payment and closing costs to be paid for through gift funds—something not available with conventional loans. Should a borrower have friends and family donate funds enough to cover any major fees, this shouldn’t be a problem. If you have people in your life who have expressed the desire to help you materialize your American dream, now may be the best time to remind them.
FHA loans may also be assumed, should a borrower choose to relinquish his or her property obligations. While it may take a while, it is refreshing to know that one has a choice to break free from certain financial accountabilities if push comes to shove.
Another key importance to remember before applying for an FHA home loan is that there is power in stored cash. People often forget that a borrower is obliged to pay for out-of-pocket fees on top of a down payment. These alone already cost thousands and thousands of money. Before reaching out to a realtor and an FHA-approved lender, find out for yourself how much cash you’re able to give to them versus finding out first how much they’re able to give you.
It is also noteworthy that there are several FHA loans available. Find out what’s best for you and what betters your current circumstances. Once that’s covered, review your FICO score and evaluate the likelihood of your approval based off of your current salary situation. An unofficial rule people consider in the loan industry is to never purchase a house when your mortgage and utility bills—on top of your house taxes—go over one-third of your monthly income.
Just like any other loans, there is also no shortage of documents needed to submit for an application. According to FHA.com, the following are the requirements:
- Address to your place of residence (past two years)
- Social Security numbers
- Names and location of your employers (past two years)
- Gross monthly salary at your current job(s)
- Pertinent information for all checking and savings accounts
- Pertinent information for all open loans
- Complete information for other real estates you own
- Approximate value of all personal property
- Certificate of Eligibility and DD-214 (for veterans only)
- Current check stubs and your W-2 forms (past two years)
- Personal tax returns (past two years), current income statement and business balance sheet for self-employed individuals
The FHA loan process shouldn’t be confusing. For home loan questions and concerns, don’t hesitate to reach out to us!