Federal Housing Administration (FHA) was created by Congress in 1934. During this period, the housing industry in the US was in distress. It was tough for over 60% of Americans to own homes. The mortgage terms were difficult to meet with high down payments of up to 50%.
To revitalize the housing market, the US government implemented FHA financing. The federally insured loan program significantly lowered the lender’s risk. This made it simple for homebuyers to qualify for mortgage loans.
The move saw homeownership rates in the US gradually climb up to a track record of 69.2% in 2004. Thanks to the FHA financing, as of the last quarter of 2020, 65.8% of Americans owned homes. But as per the trading economics, the rate has reduced to 65.6% in 2021 due to the pandemic.
Making a smart decision on your home financing option is a money saver. Are you looking for a fantastic mortgage loan to push you to realize your homeownership goals? FHA financing has got you covered.
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What is FHA financing?
This is a government-backed mortgage. It is insured by the federal housing administration. The loans are only issued by approved mortgage lenders.
It is a good option for first home buyers or anyone building or recovering their credit score. With an FHA loan, the down payments are as low as 3.5%. The loan terms are 15 to 30 years.
FHA financing requirements
To get an FHA loan, the lender must scrutinize your mortgage application to determine whether you qualify for the loan. This is in relation to:
#1: Credit score
Are you worried about your credit score? FHA lenders are flexible with credit score requirements. The minimum credit score is 500.
If you have been declared bankrupt you can still qualify for an FHA loan. You only need to reinstate your good credit and wait for two years to elapse.
In case you have any financial liabilities, make on-time payments for 12 straight months before applying for an FHA mortgage loan.
#2: Down payment
The down payment required depends on your credit score. If you have 500 to 579 you qualify for an FHA loan, but, with a down payment of 10%. With over 580 you will need a 3.5% down payment.
The amount used as a down payment must be from FHA-approved sources. The most common are; savings account, cash saved at home, retirement benefits, cash from the sale of property, and gifts.
Gifts can be from friends or family members. They can fully cover the down payment. For the gift to be accepted, the individual or organization giving the gift must give a letter indicating that they don’t expect repayment of the money.
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#3: Mortgage Insurance premiums
To protect the lender, you must have FHA mortgage insurance. The premiums are used for monthly mortgage payments in case you default in making payments.
The funds are deposited to an escrow account established by the US treasury department. There are two types of mortgage insurance premiums (MIP). They include:
1. The upfront MIP
It is paid when the borrower receives the loan. It is mostly added to the total loan. It amounts to 1.75% of the loan amount.
2. Annual MIP
These are monthly payments. The premium ranges from 0.45% to 1.05% of the loan amount. The premium amount depends on the length of the loan, loan amount, and the loan to value ratio.
If you pay a down payment of 3.5%, you will pay the annual MIP until the loan is fully paid. But for a 10% down payment, you remit the premiums for 11 years.
#4: Proof of employment history
You must have a stable employment record or have worked for one employer for at least two years. Alternatively, if you are self-employed, you should have a victorious self-employment history. This can be established from your income statements and tax returns.
#5: Principal residence
The home must be your primary residence. This means you have a plan of living in it within 60 days of closing the purchase. FHA financing is not meant for real estate investing. Condominiums, townhouses, detached, and semi-detached houses can be financed through FHA loans.
#6: Front end debt ratio
This ratio determines how much of your monthly gross earning is used for mortgage payments. It should not exceed 31% of the total monthly income.
#7: Debt to income ratio
The debt to income ratio is the percentage of your gross monthly income that is spent on paying debts. This includes; student loans, credit cards, and other financial obligations. Your back-end debt ratio should not exceed 43% of your monthly income before tax.
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#8: Property appraisal
It is conducted by an FHA-approved appraiser. They assess the home to ensure it meets the FHA property standards. A house should be safe, secure, and structurally sound. The appraisal checklist includes:
- Property access
The house must be reachable in a safer and adequate manner for both vehicles and pedestrians. The street surfaces must be all-weather for easy usage by emergency vehicles in any weather condition.
- The roof
The appraiser must check the attic to confirm there are no roof damages. The roof must not have more than 3 layers and must be anticipated to last for at least the following two years.
- Electrical and heating systems
The property must have a working heating system and an electrical system. The wires should not be exposed or loose.
- The walls must be free of chipping lead paint.
- The house must have clean water, gas, electricity, and a sewage system.
- Health and safety hazards should not be in the house.
- It must not be infested by wood-destroying insects.
- Underground tanks should be in a good condition with the absence of soil contaminants.
Bottom line
A first or second homebuyer, FHA financing is a good option. With your low credit score, you can qualify for a loan. The deal gets sweeter with the attractive low-down payments. Get an approved lender and commence your homeownership journey.
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