There are some distinct advantages that make FHA mortgages a great choice:
Federal Housing Administration (FHA) loans are U.S. government-backed home loans. Homebuyers, particularly first-time buyers, may find that an FHA loan is easier to qualify for than a conventional loan. To get an FHA loan, you must work with a qualified mortgage lender such as Capital Bank Home Loans. Qualified lenders provide access to FHA loan products and expert advice on mortgages that fit your particular needs.
Here’s some information on FHA loans, the benefits, and requirements.
What is a Federal Housing Administration (FHA) Loan?
FHA loans are mortgages insured by the U.S. government’s Federal Housing Administration. That insurance allows lenders to offer qualifying terms that are more generous and less strict than some other types of mortgages.
FHA loans were designed to help lower- to moderate-income buyers become homeowners. Many young, first-time buyers who are just starting their careers and have limited savings for a home down payment fit that category. For example, FHA loan terms may include:
- Lower down payments
- Lower closing costs
- Easy qualifying credit scores
FHA Loan Benefits
Low down payments of as little as 3.5% of the home’s purchase price with a 580 credit score or higher
You can borrow up to 96.5% of a home’s value with an FHA loan, which translates to a low down-payment requirement of 3.5%. Conventional loans typically cover a smaller percentage of the mortgage which require down payments of 5% to 20%. The better your financial profile, the more you can borrow, and the less down payment required in any loan.
Low buyer credit scores
Conventional mortgages typically require no lower a credit score than 620 to qualify for loan. FHA home loans allow a minimum credit score of 500 with a 10% down payment. Guidelines and policies will vary by lender.
Higher debt-to-income ratio than allowed by conventional mortgages
Debt-to-income ratio means how much you owe compared to how much you earn. To calculate, what you owe each month (credit card and car payments, rent or mortgage payment, etc.) is divided by monthly pre-tax earnings. The FHA limits for debt-to-income ratios are 31% for housing-related debt, and 43% for total debt. These are general guidelines and are evaluated and applied on an individualized basis.
How Do FHA Loans Work?
Loans are all about risk for the lender: Are they going to get their money back? That’s why they require so much information about your finances, to see if you’re a good risk! With a federally backed loan, a mortgage lender is taking less risk than normal, knowing that their money is partially insured against a homebuyer’s failure to repay.
Part of that insurance falls to the homebuyer. For example, 2021 FHA rules require you to purchase mortgage insurance premium (MIP) on certain loans, which protects lenders against default (nonpayment). MIP will be wrapped into your monthly loan payments. According to Bankrate.com, all FHA loans also require the borrower to pay an upfront mortgage insurance of 1.75 percent of the loan amount, paid when you get the loan.
Here’s a short video about how FHA loans work.
FHA Loan Requirements
There are limits placed by FHA on how large a loan they will insure in each state, county, or metropolitan area, based on the cost of housing there. Your loan officer will be able to tell you loan limits in your location. In 2021, that’s generally $356,362 for single-family homes in low-cost areas and $822,375 in high-cost areas, according to Nerdwallet.
The home you buy with an FHA-insured loan must be your main residence and meet FHA’s property requirements (see “What Disqualifies a House” below). Additionally, FHA lenders will have their own requirements – so be sure to ask what those are as you shop for a lender.
Here are other FHA-backed loan requirements that you should know about.
FHA loans require a minimum credit score of 500, though most lenders require at least 620 and minimum requirements can vary based on your lender. To check your credit score, many banking or credit card account dashboards now display that when you log in to the app. You also can read about how credit plays a role in getting a mortgage and learn how to get your free credit report, clean up your credit, and increase your score in preparation for buying a home.
What Disqualifies a House from FHA?
Homebuyers looking to finance a home with an FHA loan may be surprised to learn that some properties are disqualified from FHA financing. This protects the lender from loan purchases on sub-standard homes that don’t meet minimum requirements of:
- Safety of occupants (things like faulty electrical or heating, or systems that don’t meet housing codes)
- Security of the home (access, hazards in and around the property)
- Soundness of structure (roof or foundation problems, or other structural defects)
A home appraiser sent by your lender will be required to look at the property and describe its condition on FHA forms. Issues can disqualify a home – or must be fixed or paid for by sellers before you close on the purchase.
Who Qualifies for an FHA Loan?
You can qualify for an FHA-insured home loan if you:
- Are a lower- to moderate-income homebuyer, including a first-time buyer
- Have a minimum credit score of 500
- Have a debt-to-income ratio of no higher than 43%
- Are purchasing a home that meets FHA price and structural requirements for that location
- Are employed, have steady income, are credit-worthy, and meet all other financial requirements
- Meet lender requirements
- Have a down payment to cover the remaining purchase price after the home loan
- Have money to cover closing costs
FHA Loan Application
FHA-insured home loans are available only through qualified mortgage lenders, such as Capital Bank, NA. Potential homebuyers often contact lenders early in the process to learn about the different and best loans and terms for their particular situation.
Before looking for a home, buyers can put in a loan application and get pre-approved for a mortgage. Particularly in active real estate markets, pre-approval has a great advantage with sellers. It shows sellers that you are able and ready to buy, and that your purchase isn’t likely to fall through because you already qualify for a loan. Pre-approval also speeds up the time it takes to get the mortgage and close on your home!
Start and complete your home loan application online with Capital Bank Home Loans, and with our QuickClose process get your loan as soon as 30 days! Capital Bank is a premier, national mortgage originator. We’ve served tens of thousands of happy homebuyers and would love to help you! Learn more about what we can offer you and why you should work with Capital Bank Home Loans.