All families, either rich or poor, deserve a safe and beautiful home. In the United States, this can happen even if you have very little savings. The Federal Housing Administration is an agency in the United States established by President Franklin Delano Roosevelt. Currently, the FHA has insured about 8.5 million single-family mortgages, more than 11,000 multifamily mortgages, and over 3,900 mortgages for hospitals and residential care facilities.
What is FHA Loan?
FHA, or Federal Housing Administration, is the largest insurer of residential mortgages in the world. It has assisted millions of people since its creation in 1934. The striking thing about FHA loan is that they have a down payment policy of as low as 3.5%.
FHA loan is beneficial for those people who are first time home buyers or those who don’t have enough money saved for a down payment. What’s more, FHA loan can not only make a home, but renovate an existing home, or replace an existing mortgage with a new loan.
Terms and Condition you need to follow to get FHA Loan Approval
There are many terms and conditions for FHA loans. It is vital to know all aspects of applying for the FHA loan.
Let’s have a look in detail.
FICO stands for Fair Issac Corporation. It is a data analytics company which determines by analysing different consumer credit files from various credit bureaus. If the FICO score is at least 580, you qualify for the 3.5% down payment.
However, if the score is between 500 and 570, you are competent for a 10% down payment. In other words, the higher the score, the more chances of getting a low down payment.
DTI should be less than 50
DTI or Debt-to-Income Ratio is a personal finance measure that compares the amount of dept to the amount of overall income. In other words, it is a measurement of the ability of the payments you can make each month to pay off the loan. Likewise, a low number of DTI indicates a better chance to avail of the FHA loan.
The FHA loan makes sure that the investment is an excellent choice. Hence, they require the borrower to meet the set property approval.
The borrower needs a Mortgage Insurance Premium for the eligibility of an FHA loan. It protects the lenders from losses that result from defaults on home mortgages.
Furthermore, FHA loan determines other factors such as the borrowers’ downpayment history, bankruptcies, foreclosures, and the ability to pay the loan timely. Thus, it is crucial to keep a check on all your factors before applying for the loan.
Pros and Cons of FHA Loans
FHA loan can surely help many families avail their dream home. However, there is always the downside of every insurance policy. Hence, it is important to weigh both positive and negative aspects of the insurance policy before taking the suitable decision.
Pros of FHA Loans
- A very low down payment – FHA loan requires a minimum FIC score of 580. It means that there is a high chance of achieving a low down payment of 3.5%.
- Allows Payment Assistance – The FHA loan permits its borrower to pay the down payment from an approved source like a friend or a close relative with proper terms and conditions. Keep in mind that not all conventional loans allow this policy.
- Low credit of 500 allowed – If your credit history is not so smooth, you might want to consider an FHA loan as the credit score is as little as 500.
Cons of FHA Loans
- Limit of the Loan – The FHA loan limits the borrowed amount based on the location of homes. It might be a setback for some if you are considering living in a high-end area.
- Mortgage insurance can be expensive – Surely, the down payment low in the FHA loan, but the premium mortgage insurance might cost you an arm. Precisely, the one-time premium is generally equal to 1.75% of the home purchase price. Furthermore, this can be financed through the mortgage or paid in cash but not allowed to have both options. Additionally, the annual premium depends on your loan amount and loan to value ratio.