What is a Federal Housing Administration (FHA) Loan?
FHA loans are federally backed mortgages issued by an FHA-approved lender designed for low to moderate-income borrowers who have a lower than average credit score. Requiring a lower minimum down payment and credit score than many conventional loans, you can borrow up to 96.5% of the value of a home (meaning you only need a down payment of 3.5%).
An FHA loan does come with certain restrictions and limits not found in other conventional mortgages. Such as the Federal Housing Administration doesn’t technically lend you money for a mortgage.
Instead, you get the loan form an FHA-approved lender and the FHA guarantees the loan. Often times your loan officer may refer to it as an FHA insured loan for that reason.
FHA Loan Requirements
For Borrowers keen on purchasing a home with an FHA loan with the outrageously low payment amount of 3.5%, applicants must have a FICO score of at least 580 to qualify. If you happen to have a credit score lower than 580, it doesn’t necessarily reject you from FHA loan eligibility. Your minimum down payment would instead be 10% rather than the standard 3.5%.
The financial assessment and upfront down payment are only two requirements of an FHA Loan. Below is the complete rundown of the FHA loan prerequisites set by the Federal Housing Authority:
- The minimum credit score of 580 for maximum financing eligibility and a minimum down payment of 3.5% (10% if you are below a 580 credit score).
- Solid job history or worked for the same employer for the past two years.
- Valid Social Security number, legal residency in the U.S., and be of legal age to sign a home loan in your state.
- Only available for your primary residence.
- Property appraisal from an FHA-approved appraiser.
- HOA fees, property taxes, mortgage insurance, and homeowners insurance needs to be less than 31% of borrower’s gross income, typically. It is possible to get approved for 40% of the borrower’s gross income.
- Monthly debt (credit card, car, student loans, etc.) needs to be less than 43% of the borrower’s gross income, in most cases. It is possible to get approved for 50%, and your lender will be required to provide an explanation as to why they believe your mortgage presents an acceptable risk.
- In most cases, borrowers must be two years out of bankruptcy and be three years out of foreclosure with good credit.
- The property must be appraised to meet specific standards, such as being the primary residence for the borrower and meeting property specifications. If the home doesn’t meet specific criteria or required repairs, you will be expected to pay for the repairs needed at closing.
Benefits of FHA loans
In most scenarios, an FHA loan is probably the easiest kind of mortgage loan to qualify for since it requires a low down payment and you don’t need to have a flawless credit score. At times borrowers cannot afford a 20% down payment, have a lower credit score, or simply can’t get approved for private mortgage insurance. In these scenarios, an FHA loan is the best option.
How Do You Get an FHA Loan
Most, if not all, banks and other mortgage lenders offer FHA loans to their clients, but their lending standards and fees can vary significantly from lender to lender. After deciding on a lender, you need to obtain the necessary application forms from the bank and submit them to your loan officer for review.
Pacific Funding Mortgage Division currently offers an application portal to apply for an FHA loan online, along with our other loan programs. Once submitted, our loan officers can then review your FHA loan application and let you know if additional information is needed, all seamlessly done from the comfort of your home. Start your loan application today!