Created in the 1930’s in response to the depression-era rash of foreclosures, the FHA mortgage loan has been used to finance the purchase of American homes for nearly 100 years. An FHA loan is a mortgage insured by the Federal Housing Administration, (FHA) is still among the most popular and convenient ways to finance the purchase of a home, particularly for individuals with lower credit scores. Read more about the FHA loan, and how a professional mortgage broker can assist you in securing one.
Overview of FHA Loans
The FHA program helps keep the housing market thriving by making mortgage loans available to as many people as possible. It does this by ensuring that people who can afford only a small down payment or those who have less than perfect credit scores can still qualify for an FHA loan and therefore purchase a new home.
Today, you can qualify for an FHA loan with a down payment as small as 3.5% of the home’s purchase price if your credit score is 580 or higher. A borrower with a credit score from 500 – 579 can qualify with a 10% down payment. For these reasons, FHA loans are especially popular among first time home buyers and borrowers with lower credit scores.
Your credit score also determines your interest rate on the loan. A borrower with a lower credit score will pay a higher interest rate than a borrower with a high credit score. Additionally, FHA borrowers with down payments of less than 20% can pay mortgage insurance premiums. The mortgage insurance enables the federal government to insure, or guarantee, all or part of the mortgage loan. Through mortgage insurance, the FHA protects the FHA-approved lender if the borrower defaults.
For an FHA loan, you will pay a mortgage insurance premium of 1.75% of the home loan, regardless of your credit score. You can pay this sum upfront at closing or you can roll the amount into the mortgage. You will also pay a monthly charge that will be computed based on your loan-to-value (LTV) ratio, loan size, and length of the loan.
Other Requirements to Qualify for an FHA Loan
Your credit score and minimum down payment amounts are just two of the requirements of FHA loans. The Federal Housing Authority has a number of other requirements you, as a borrower, must meet to qualify for an FHA loan. These include:
- Steady employment history.
- Valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state.
- Home must be your primary residence.
- Home must be appraised by a FHA-approved appraiser.
- Your mortgage payment plus any HOA fees, property taxes, mortgage insurance, and homeowners insurance must total less than 31 percent your gross income, with some exceptions possible.
- Your mortgage payment plus all of your monthly debt, i.e., credit card payment, car payment, student loans, and so on, must be less than 43 percent of your gross income, with some exceptions possible.
- No bankruptcy filing within the last two years and good credit has been re-established, with some exceptions possible if there were extenuating circumstances.
- No foreclosure within the last three years and good credit has been re-established, with some exceptions possible based on extenuating circumstances.
- The property meets certain minimum standards at appraisal or you will have to pay for the required repairs at closing (to be held in escrow until the repairs are complete).
Can You Have Multiple FHA Loans?
Generally, the FHA will not allow you to have more than one FHA loan at a time. But the FHA makes exceptions under limited circumstances, such as:
Relocation: You may be eligible for a new FHA loan when you relocate for an employment-related reason and the new location is more than 100 miles from your current home.
Increase in family size: If your family has grown since you moved into the home and the home no longer meets your family’s needs, you could qualify for another FHA loan. However, to meet this exception, the Loan-to-Value ratio (LTV) must be 75% or less on your current principal residence as determined by a current appraisal and your outstanding mortgage loan balance.
Leaving a jointly owned property: If you are leaving your current principal residence with no intent to return and the residence will continue to be occupied by the co-borrower, you might be able to obtain an additional FHA loan.
Non-occupying co-borrower: You could also be eligible for another FHA loan if you were co-borrower on a current FHA loan but do not live in the home.
Contact Fairfax Mortgage Investments for More Information
The experienced mortgage brokers at Fairfax Mortgage Investments can determine whether an FHA mortgage loan can help you buy the home you want. An FHA mortgage loan is perfect for many first time buyers and home buyers in northern Virginia and the surrounding area who are working to reestablish their creditworthiness. Consult a Fairfax Mortgage Investment Broker for information about the best mortgage loan program for you.