FHA Home Loans for First Time Home Owners
Numerous people who dream of purchasing their own home may encounter various financial challenges. That’s mainly because buying a home comes with a range of costs and approval criteria. Notwithstanding, by getting the right information on what’s available for your situation, you will greatly improve your chances of getting a loan and the home you want. This article will outline details on getting a FHA loan. What characterizes this particular program, and is it the best choice for your financial status? We’ll answer that and many other questions.
FHA – What it is and how it works?
FHA is a part of HUD and is a government-backed insurance that allows lenders to provide you a better deal. What makes it more convenient than conventional loans is that it provides the borrower with flexibility when it comes to repayment options.
This flexibility extends to the qualification process, which is less rigid as opposed to conventional loans. Additionally, veterans and military members may benefit from further advantages, such as being eligible for approval with minimum or no down payment at all. All in all, this program is crafted for all kinds of families and individuals, including low earners. Let’s get acquainted with the main features of the program, and the options borrowers can benefit from.
Benefits of FHA
- Increased flexibility
- Ease of qualification
- Low closing costs
- Numerous repayment options
- Immediate approval
- Prompt cash access
FHA Loan Options
It’s important to get acquainted with various types of FHA loans, in order to make a sensible decision, which suits your current situation. The monthly repayment amount will depend on the kind of loan you choose.
- Conventional fixed-rate mortgage – these loans are established for a particular amount of time while the interest rate is settled upon signing the contract. In other words, the interest rate isn’t prone to suffering any changes, in spite of market alterations that may occur, apart from fluctuations in homeowner’s insurance and property taxes. Typically, this kind of mortgage is featured by a prepayment penalty. All in all, the fixed-rate option is a good alternative for individuals who plan to be the owners of the home for a long time and have a steady income.
- Conventional adjustable-rate mortgage – this type of loan is also set for a fixed period. However, it differs from the fixed-rate option, as the interest is likely to change throughout the lifetime of the loan. Generally speaking, borrowers might expect to pay a fixed interest for the first five years of the loan. Nonetheless, after that amount of time passes, the interest rate is prone to increase, together with your mortgage repayments. This option may be right for you if you plan on living in the house you purchase for a particular amount of time, as long as the interest rate is fixed.
- Hybrid mortgage – this alternative is similar to the adjustable-rate mortgage. The only distinction is that the fixed-rate amount of time is typically longer. For instance, the interest rate for a hybrid mortgage may be fixed for the first ten years of the loan. Afterward, the borrower should expect to pay higher interest rates. If the borrower anticipates that the future will bring prosperous financial prospects, this alternative is welcome.
- Jumbo fixed rate mortgage – this type of loan is created particularly for individuals who are in need of a significant amount of money, namely $333,700 or above. The lender faces significant risks when borrowing such a sum. On that account, the interest rates are exceedingly high in comparison with the conventional fixed rate alternative.
- Balloon mortgage – this loan is featured by small repayment amounts at the incipient phase of the mortgage. Afterward, the borrower will pay off the borrower sum at a later date. For example, in the case in which an individual acknowledges that, in ten years’ time, he/she will have access to a consistent family trust. One can consider the balloon mortgage, make small repayments at first, and, when one gains access to finances, can make more consistent
- Bridge mortgage – the FHA program provides individuals with bridge loans, which stand for loans that enable borrowers to buy a house before selling their current home. In this scenario, the mortgage payment is significantly higher, due to the fact that the loan pays for both homes, until the initial house is sold.
- Home loan guarantee program – this program is established particularly for veterans, enabling them to purchase a house without having to place a down payment. Additionally, veterans may obtain money for making their new house energy-efficient.
- Self-employed mortgage – for people who are self-employed and typically encounter difficulty in demonstrating a steady income, this option is suitable.
- Equity loan – a home equity loan facilitates homeowners to obtain a loan based on the equity of the current home one lives in.
- Relocation loan – being very much alike the bridge loan, this alternative is created for individuals who require a loan in order to relocate to a new home. Meanwhile, their current property may exist on the market.
Opting for FHA is a viable option for many families and individuals with low income. However, before you send in your application, get acquainted with the primary pros and cons of the program:
- Low down payment
- Low credit threshold
- Popular for refinancing
- Ease of qualification
- Attractive options for veterans and military members
- Flexible income requirements
- High debt-to-income ratio
- Subject to high mortgage insurance
- Potentially higher interest
Eligibility for FHA Loans
Your eligibility for getting approved on receiving an FHA loan will depend on the following aspects:
- U.S. resident
- Certificate of eligibility – for veterans
- At least 18-years-old
- A valid security number
- Down payment – FHA implies a minimum down payment of 3.5 percent, with the exception of veterans and military members.
- Employment record
- Address to your residence
How to Apply for FHA Loans
Once you are certain that you qualify for an FHA loan, you can research what lenders in your area provide borrowers with this alternative. Remember that not all financial institutions furnish borrowers with FHA loans. It’s important to prepare relevant documentation that will verify a steady income, together with a credit report. Additionally, you should put together the sum of down payment, which is smaller in comparison with other loans. You are expected to complete an FHA loan application that the lender will provide you with. You should understand the questions.
In a nutshell, you’ll need credit score and income documentation, down payment, loan application, and other documents your lender may require. You can apply for such a loan at the lender’s office, or online, in some instances.
Other First Time Home Owner Programs
In addition to FHA home loans, you may want to consider USDA home loans for those in rural areas and VA home loans for veterans or their surviving wives.
What credit should I have to be considered eligible for FHA?
Typically, your eligibility for FHA will depend, to some extent, on your credit from the past two years. Your bills should be paid within the given timespan. Any delays may put a black spot on your credit. Prompt payment of monthly expenses is of great significance, qualifying you as a reliable borrower. An applicant is expected to present a score of 580, or higher. Nonetheless, having lower scores doesn’t necessarily mean that you won’t qualify for approval. In that scenario, the down payment requirements, and the mortgage interest will be significantly higher.
If your credit record isn’t according to the standards, presenting relevant records of timely rent payment, phone, and utility bills will account for proving that you’re a responsible spender. Additionally, we recommend you to review your credit record before sending in an application; possible inaccurate errors may exist, which will jeopardize your prospects.
What are the limitations for FHA?
Generally speaking, a borrower’s eligibility for FHA depends on the way in which one has handled credit in the recent years, as well as on his/her employment history and financial status. While low-income families may qualify for FHA, cases of severe credit problems – bankruptcy, foreclosure – will make it harder for the borrower to receive approval, while still not excluding the possibility at first. Nonetheless, the program is less likely to provide financing to a borrower who experienced bankruptcy for a significant amount of time, after a foreclosure.
Which is the minimum amount of down payment for FHA?
The down payment for an FHA loan is 3.5 percent. Nonetheless, this flexible option does come with a primary downside – the long-term interest rate tends to be specifically higher as opposed to conventional loans.
How do I pre-qualify for an FHA loan?
There are multiple factors you need to take into account to pre-qualify for an FHA loan. You have to demonstrate job stability, employability, and job security. Reliability refers to having a steady job for at least two years, at the same company. Additionally, your income should be consistent.
In the case of foreclosures on your record, they should be three years old, for the least, and the same principle applies to bankruptcy. The bottom line is that you must demonstrate that your risk as a borrower is minimum. This way, you’ll stand a significant chance of receiving approval on your FHA loan application. You can check here whether you qualify for an FHA loan or not.