What Are FHA Loans?
The Consumer Financial Protection Bureau offers a short answer to a question that many would-be homeowners ask: What are FHA loans? These are government-backed loans, but they’re not made by the FHA. Instead, the money is handed out by participating private lenders who follow guidelines established by the FHA. This government insurance reduces the risk for lenders. It allows them to work with borrowers who have lower credit scores and accept smaller down payments. FHA loans can make homeownership available to buyers who might not qualify for other loans.
What Are the Requirements for an FHA Loan?
Could an FHA loan be the right tool to help you purchase your dream home? As Zillow explains, borrowers have to meet certain requirements to use this type of financing:
- You must have a valid Social Security number and be a lawful resident of the U.S.
- You must have a steady employment history.
- You must plan to make the home your primary residence.
- You must have a down payment of at least 3.5 percent and a credit score of 580 or higher. If you have a credit score between 500 and 579, you’ll need a down payment of at least 10 percent. Gifts from family members can be used to fund down payments as long as they are properly documented.
- Your front-end ratio generally needs to be less than 31 percent of your gross income. In some cases, lenders may approve borrowers with ratios as high as 40 percent.
- Your back-end ratio generally needs to be less than 43 percent of your gross income. In some cases, lenders may approve borrowers with ratios as high as 50 percent.
- You must be two years out of bankruptcy and have re-established your credit to be approved. Exceptions may be made after one year if you can show there were extenuating circumstances.
- You must be three years out of foreclosure and have re-established your credit to be approved. Exceptions may be made after one year if you can show there were extenuating circumstances.
- The property must pass a property appraisal from an FHA-approved appraiser.
What Types of FHA Loans Are Available?
If you ask a dozen people to describe their dream home, how many different answers would you get? Housing goals vary widely, and different loan products exist to help people meet those varied needs. There are several kinds of FHA purchase loans. NerdWallet offers some insights about a few of the most popular types:
- Basic Home Mortgage 203(b): The basic FHA purchase loan is worth a look when you want to buy or refinance a primary residence. It’s especially appealing for people who don’t have much saved for their down payment.
- 203(k) Rehab Mortgage: If you’ve always wanted to buy a fixer-upper, this home loan may be the perfect fit. It’s used to finance both a home purchase and more than $5,000 in repairs. The renovation work must be completed by a professional contractor.
- Construction to Permanent Mortgage: When you’re hoping to buy land and build, this might be the loan for your needs.
Are you interested in learning more about FHA loans? Turn to the experts at PrimeLending Dallas. We’re happy to answer your questions and help you reach your housing goals. Ask us how we can help you today.