People with a low credit score or a minimal down payment can have difficulty qualifying for conventional mortgage products. To help people in these situations afford a home, the government backs mortgages provided through the Federal Housing Administration.
Federal Housing Administration (FHA) loans are ideal for older borrowers or first-time home buyers. The FHA also has loans for energy-efficient mortgages to help home buyers improve a home's energy efficiency as part of the mortgage. FHA loans are designed to have minimal closing costs (usually 3 to 5%), low down payment requirements, and can be easier to qualify for the loan.
An FHA loan maybe 15 or 30 years and have fixed interest rates. The rates vary from one lender to the next, but as of 9/21/21, most FHA lenders are in the 2.5 to 2.6% range. Borrowers have to pay for additional FHA mortgage insurances that protect lenders from a financial loss if the borrower defaults. Those insurances can add as much as 2.8% to the loan amount.
Who Qualifies for an FHA Loan?
To qualify for an FHA loan, you have to have a credit score of 500 or higher. If your credit score is 500 to 579, you need to have 10% down. If it's 580 or higher, you can have as little as 3.5% down. If you've filed for bankruptcy in the past, you must wait at least three years before applying for an FHA loan.
You need to have been employed for two or more years. Be prepared to provide tax returns, pay stubs, and bank statements to verify your income. Your mortgage payments cannot be more than 31% of your gross income. Total debts cannot be more than 43% of your income.
The home must be your primary residence. You cannot take out an FHA loan to buy a house you plan to rent out. Once you've chosen the home to purchase and applied for an FHA mortgage, the home must meet HUD guidelines. It has to be inspected by an FHA-approved appraiser.
How Do You Apply?
To apply for an FHA loan, you need to work with a local HUD lender. The HUD.gov website has a search directory that allows you to look for lenders. Once you find one, schedule a meeting with a lender to learn what your next steps are.
What If You're Struggling to Pay Your FHA Mortgage?
With the pandemic causing shut-downs and temporary closures, some people had a hard time paying their mortgages and other bills. FHA loan relief products helped. Borrowers have to ask their lender for help. They may be offered deferments or loan modifications that lower the payments or interest rates. Extensions of up to 18 months are available to qualifying borrowers.
One of these programs is the COVID-19 Advanced Loan Modification (COVID-19 ALM) program. This program drops your principal and interest payments by 25%.
It's crucial that you keep a line of communication open with a lender approved to offer or help with FHA loans. When you apply online, you'll have the information needed to ensure your application is complete. If you don't qualify for an FHA loan, a loan expert will have other options available to help you out.
