Find out what an FHA loan is, who qualifies for one, and the pros and cons of 3 different kinds of FHA loans.
If you’re looking to buy a new home or are a first-time home buyer, you may be worried that you won’t qualify for a mortgage. But did you know that even if you’re struggling to save money for a down payment or don’t have great credit, you may still get approved for an FHA loan?
In this episode I’ll tell you what an FHA loan is, who qualifies for one, and the pros and cons of getting 3 different kinds of FHA loans..
What Is an FHA Mortgage Loan?
Many people have heard of an FHA loan, but aren’t sure exactly how it works. An FHA mortgage is a loan that’s insured by a government agency called the Federal Housing Administration (FHA). The FHA insures loans that meet certain requirements and may apply to a variety of properties, such as single family homes, multifamily homes, and manufactured homes.
The FHA doesn’t actually make loans to consumers. Instead, it provides insurance to FHA-approved lenders so they feel comfortable making a loan to a somewhat risky borrower. Having FHA insurance protects lenders and reduces their risk of loss if a borrower defaults and doesn’t make their loan payments.
The FHA program is funded by homeowners who pay the mortgage insurance, not by taxpayers. I’ll tell you more about those costs in a moment. Having insured over 34 million properties since 1934, the FHA is the largest mortgage insurer in the world.
Who Qualifies for an FHA Mortgage Loan?
Not everyone qualifies for an FHA loan. You must be a legal resident of the U.S., have a valid Social Security number, and demonstrate steady employment for at least 2 years.
While you don’t need good or even average credit to qualify for an FHA loan, you can’t have extremely poor credit, either.
You must also meet certain financial qualifications: The total cost of the home—including the mortgage payment, mortgage insurance, property taxes, home insurance, and any homeowner association fees—must typically be less than 31% of your gross income. Additionally, the total of all your debt must typically be less than 43% of your gross income.
While you don’t need good or even average credit to qualify for an FHA loan, you can’t have extremely poor credit, either. However, in some cases, you can compensate for a low credit score by making a higher down payment.
You can even get approved if you’ve had a bankruptcy that’s over 2 years old or a foreclosure over 3 years old, if you’ve re-established good credit. Exceptions can be made by lenders depending on your circumstances.
The property you’re buying or refinancing must also pass inspection by an FHA-approved appraiser. If it doesn’t meet minimum FHA standards, either you or the seller must agree to make the required repairs.