A Primer on FHA Loans

Written by Posted On Friday, 03 January 2014 07:17

If you’re a first-time homebuyer, you might find the world of home finance a bit daunting. Mortgages come in all shapes and sizes, and interest rates can vary depending on your financial security, credit standing, and the size of home loan you are pursuing. Conforming, jumbo, fixed- or adjustable-rate … what does it all mean?

One type of loan for which you might qualify is an FHA loan. Since 1934, the Federal Housing Authority (FHA) has provided countless homebuyers with access to guaranteed, government-insured loans. This program has extended the option of home ownership to many responsible first-time buyers. While FHA loans are generally easier to qualify for than conventional home loans, it’s important to know a little bit of background information about this type of loan if you intend to apply for one. Here are a few facts worth noting for those interested in an FHA loan:

•The FHA does not actually provide loans; rather, it guarantees them. Only FHA Qualified Lenders are authorized to provide these loans, which the FHA then insures. 

•FHA loans require both a credit report and an appraisal of the property for sale. If you begin the application process for an FHA loan, you should be prepared to pay for both. As with all home loans, a high credit score is essential to your ability to qualify.

•Loans backed by the FHA vary in different parts of the country in terms of loan cap amounts and general guidelines. Consulting a loan officer is vital to understanding the regional rules governing loans in your area.

•One of the attractive features of an FHA loan is its low down payment requirement. While most conventional loans involve a down payment of 20%, FHA loans can carry a down payment requirement as low as 3.5% – a great benefit to first-time homebuyers with financial security, but without a lot of reserve cash on hand.

•Due to the low down payment requirement, borrowers securing FHA loans must purchase mortgage insurance to protect the lender from the risk of loan default. Additionally, in 2014, new regulations governing a borrower’s ability to repay a home loan will go into effect, and may alter eligibility across all loan types.

•Your debt-to-income (DTI) ratio is also important in determining your eligibility for an FHA loan. In order to qualify, your total DTI shouldn’t be in excess of 41% of your gross monthly income.

•When pursuing an FHA loan, expect to provide ample documentation in the way of bank statements, employment verification, tax returns, pay stubs, and any other documents related to your financial holdings. Loan requirements in general are more stringent than ever, so be prepared to prove your financial solvency.

•FHA loans carry different interest rates that vary by lender, so make sure to do your homework and set your sights on the most attractive rate available to you.

There are exceptions to every rule, so while the above guidelines apply to most FHA loans, you should check with your lender or loan officer to determine your personal eligibility for an FHA loan. Every mortgage lender can use its own guidelines when screening applicants for FHA loan eligibility. It’s important to remember that individual lenders may impose stricter requirements than the minimum criteria expected by the government for qualification, so meeting the government expectations for an FHA loan is not a guarantee. However, FHA loans do tend to grant more leeway to borrowers than conventional loans, so if you feel like you are in a good position to qualify, it’s well worth consulting your lender for additional information.






Rate this item
(2 votes)
Jason Bonarrigo

Senior Mortgage Banker, RMS Mortgage NMLS#698459


Agent Resource

Limited time offer - 50% off - click here

Realty Times

From buying and selling advice for consumers to money-making tips for Agents, our content, updated daily, has made Realty Times® a must-read, and see, for anyone involved in Real Estate.