Government-insured mortgages provide an alternative option for homebuyers who fail to qualify for conventional mortgages because of credit, income, or asset issues. Out of several loan options available, the FHA Loan programs are some of the most patronized among first-time home buyers and applicants with less-than-perfect credit.
Like conventional loans, FHA mortgages are also originated by private lenders. What makes them special is that FHA loans are insured by the HUD. Thus, lenders are protected against financial risks and losses, should any of the borrower defaults. It is the backing of the federal government that allows lenders to ease approval standards for this specific program.
Advantage of FHA Loans
FHA loans welcome homebuyers from all walks of life. Anybody who wants to take advantage of its less stringent qualification requirements, more relaxed underwriting guidelines, and lower down payment requirements may apply for the mortgage program through FHA-approved lenders.
Anybody with a credit score of at least 580 may qualify for an FHA loan with only a 3.5% down payment. Applicants with credit scores below the minimum may qualify but are required to put a more substantial downpayment of at least (ten percent 10%). There is also a debt-to-income ratio limit, which currently stands at 50%; this means your accumulated debts (including the mortgage) must not exceed half of your gross income.
FHA Qualification Requirements
As with most loans, families, and individuals who wish to qualify for FHA loan should submit all necessary documentation and comply with all the requirements set by both the Federal Housing Administration.
To qualify for an FHA mortgage, the applicant must:
- Apply for a loan that is within the set FHA limit of the county;
- Meet the required minimum credit score, which is at 580, to qualify for the 3.5% down payment;
- Come up with funds for the down payment and closing costs, which may be in the form of “gifts.” Must provide their last 2 months bank statements and any other assets to be used as the source of funds to close on the loan;
- Provide documents that support claims of stable employment such as their 30-day paycheck stubs, W2’s, tax returns, etc.;
- Purchase a property to be used as the borrower’s primary residence
The Problem with FHA Loans
Even though FHA loans are so much easier to obtain than conventional ones, they are not as financially sound as they appear to be mainly because of the enormous mortgage insurance obligation that comes with them.
Unlike most loans that only require a single premium mortgage insurance if the lender puts down less than 20% deposit, the FHA loan’s insurance is comparatively more expensive as it calls for two mortgage insurance premiums, paid throughout the life of the loan. It is in this aspect of the loan that many homebuyers begin to have second thoughts and ponder on whether to go on with it or take more time improving their credit scores to someday qualify for a traditional mortgage.
The Bottom Line
It is worth mentioning, however, that the FHA’s unique insurance policy has not deterred many applicants. Tens of millions of Americans are proud homeowners, thanks to this particular government-backed mortgage.