FHA Loans -How they work
An FHA loan is a type of mortgage insured by the Federal Housing Administration. The purpose of this loan is to help homeless people buy a new home. In this article, you will learn about the qualifications required to apply for an FHA loan and how it works.
What is an FHA loan?
FHA loan is best for those who have low credit card and downpayment. Borrowers who are not eligible for a conventional loan but want to buy a home are helped by giving a loan. However, it is not only for first time home buyers, it is also suitable for everyone. Unlike conventional loans, it does not have income limit.
How does an FHA loan work?
Although FHA loans work like other conventional loans, lender requirements are less. FHA loan is best when you meet the requirements.
- Your credit card must have a minimum score of 500 and a maximum score of 619.
- The amount of money you can borrow depends on the FHA loan limit of the country you are going to buy a home from.
- You can buy a house for single family and multifamily in 2 to 4 units by paying 3.5% down payment.
- You will qualify for a loan on the co-borrower’s income even if he is not at home.
- Your bankruptcy period is over 3 years.
- Your home foreclosure has a term of over 4 years.
- You did not qualify for a conventional loan.
Different types of FHA loans
FHA streamline refinance
If you have an existing FHA loan, you will qualify for the FHA Streamline Refinance Program. It even offers you a loan on better terms and even avoids your home valuation and other documents.
FHA cash-out refinancing
You can qualify for this program if your credit card score is less than 500. Cash-out refinancing allows you to borrow up to 80% of the current value of your home.
FHA rate-and-term refinance
If you have a bad credit card score, you can borrow 97.75% of your home value through this program. If you do not want to pay the closing costs yourself, you can include it with the loan amount.
FHA 203(k) loan
Through this program the borrower will be able to buy a new home, even refinace. You can roll the costs into a loan for your home renovation.
Home equity conversion mortgage
This program is primarily designed for people 62 years of age or older. It is mainly a home equity loan with no monthly payments.
FHA GPM/GEM loan
Those who have a low monthly income but are likely to increase it in the future are considered eligible for this loan. The amount of monthly payment is small and it increases as income increases.
Conventional loans vs. FHA loans
| Loan features | FHA loan | Conventional loan |
| Minimum down payment | 3.5% with 580 credit score | 3% |
| DTI ratio | 43% to 50% | 45% to 50% |
| Minimum credit score | 500-579 with 10% down payment 500 with 3.5% down payment | 620 |
| Maximum loan limits | $420,680 | $647,200 |
| Mortgage insurance | Annual and upfront fee | Annual fee |
| Income limit | No income limit required | No income limit required |
FHA loan requirements
- FHA credit card score
If your credit score is 580 or higher, you will need to pay a 3.5% down payment. If the down payment is 500-579 then you will be eligible for 10% down payment.
- Foreclosure and bankruptcy waiting periods
If you lost your home for foreclosure, you would have to wait 3 years before applying for a loan. You have to wait 2 years after bankruptcy.
- FHA down payment
If you have a credit card score above 580, you will need to pay a 3.5% down payment. If the credit card score is at least 500, then 10% down payment is required.
How to apply for an FHA loan
- Since not all lenders offer the same benefits, you should talk to 3 to 5 lenders about the advantages and disadvantages of the loan. Choose the best lender for you.
- Then fill in the required information in the application form provided by the lender.
- Give the lender permission to verify the credit card.
- Provide details of income history and employment for last two to three years.
- If you have a defaulted loan then explain about it.
