Part of the Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA) was created in 1934 as part of the U.S. response to the Great Depression. As Forbes reports, it was charged with making homeownership more attainable for Americans through a mix of attractive interest rates and lower down payment requirements. Today, the FHA’s loan program still appeals to aspiring homebuyers. What is an FHA loan? Could it be the right loan for your needs?
What Is an FHA Loan?
With so many options, the quest to choose a home loan can quickly become overwhelming. Understanding a bit about how the FHA loan works, its advantages, its drawbacks, and the requirements for borrowers can help you determine if this type of loan might be a good fit for your specific situation.
Understanding the FHA Loan
What is an FHA loan? It is often referred to as a government-backed loan. As the Consumer Financial Protection Bureau reports, the FHA doesn’t actually make the loans. It leaves that to private lenders. Instead, it guarantees a portion of the loan, reducing the risk to lenders and enabling them to make home loans that they might otherwise be reluctant to make.
FHA Loan Advantages
As Credit Karma notes, there are several reasons that borrowers find FHA loans appealing:
- Imperfect credit is okay. A good credit score is always welcome, but a shaky one isn’t a dealbreaker for an FHA loan.
- Small down payments are acceptable. Borrowers with credit scores of 620 or above can secure an FHA loan with a down payment of just 3.5 percent at PrimeLending Kansas City.
- Down payment assistance* is allowed. For a FHA loan, down payment assistance can come from various programs or financial gifts as long as everything is properly documented and FHA requirements are met.
- Sellers can assist with closing costs. Sellers may pay up to 6 percent of a buyer’s closing costs with an FHA loan.
FHA Loan Drawbacks
As The Balance indicates, there can be disadvantages to using FHA loans:
- Loan limits may limit your buying power. With FHA loans, there are limits on how much you can borrow. It varies depending on the area, but if you live in a competitive area, and you’re seeking a large loan, you may find the limits confining.
- Mandatory mortgage insurance adds to the cost of the loan. Borrowers using an FHA loan must pay a mortgage insurance premium upfront at closing. In addition, there is a monthly mortgage insurance premium that continues for the life of the loan.
Qualifying for an FHA Loan
What does it take to qualify for an FHA loan? According to Zillow, borrowers will need to meet some basic requirements:
- The borrower must have a valid Social Security number, be a lawful resident of the U.S., and be of legal age to sign a mortgage in the state.
- The borrower must have a steady work history.
- The borrower must be at least two years out of bankruptcy, three years out of foreclosure, and have re-established good credit.
- The borrower must have a down payment of at least 3.5 percent.
- The borrower’s front-end debt-to-income ratio should generally be less than 31 percent.
- The borrower’s back-end debt-to-income ratio should generally be less than 43 percent.
- The property must be intended for a primary residence, appraised by an FHA-approved appraiser, and meet certain minimum standards.
Most lenders offer FHA loans. If you’re interested in using this form of financing for your home purchase, why should you choose PrimeLending Kansas City? Our services come with personal attention and clear guidance from an expert team that knows the Kansas City market inside and out. Contact us today to learn more.
*Certain restrictions apply. Not available in all areas. Please contact your PrimeLending loan officer for more details.