The journey to homeownership is fraught with mixed emotions. At one point, you get very excited about buying a home. The next, you’re caught in the middle of what can be a stressful and overwhelming home loan application process.
If you’ve been researching possible home loan options, then you’ve probably already heard of FHA loans. It’s a government-backed home loan program that’s quite popular among first-time home buyers and individuals with not-so-ideal credit situations.
Are you planning to apply for an FHA loan?
Let’s take a closer look at the FHA loan and what sets them apart from regular home loans.
The Lowdown On FHA Loans
FHA loans are in many ways similar to other mortgage options, except that they require a much lower down payment and have less stringent qualification requirements.
You can get an FHA loan with as little as 3.5% down and a credit score of at least 580. These features make the program an appealing option for many first-time home buyers and aspiring homeowners who are having a time getting a conventional mortgage because of their poor credit situation.
The Federal Housing Administration does not directly offer FHA loans. The agency only insures these loans. You can apply for an FHA loan through an FHA-approved lender in your area.
FHA Loan Qualifications
There are specific requirements that a borrower must meet to qualify for an FHA loan. While the primary conditions may vary from lender to lender, banks and mortgage companies typically look at the following factors when evaluating your application:
- Credit history
FHA loans are more lenient than most loan options regarding credit scores. Some lenders approve loans for applicants with credit scores as low as 500. However, to avail of the 3.5% down payment rate, you must have a credit score of 580 or above. Also, a higher credit score usually means you get better loan terms.
- Debt-to-income ratio
Your debt-to-income ratio (DTI) is the percentage of your pre-tax monthly income that goes to paying your debts, including your mortgage. Some FHA lenders qualify applicants with a DTI of 50%, but you’ll have a better chance of getting approved for an FHA loan with more favorable terms if you keep your DTI lower than 43%.
- Source of income and employment
While no minimum or maximum income is required to qualify for an FHA mortgage, your lender will require you to present proof of income and employment to gauge your capacity to pay.
Ideally, you must have worked for the same company or employer for the past two years.
Before You Apply For An FHA Loan
The FHA loan is tempting with its more affordable down payment and flexible qualification requirements. Before you go house-hunting or submit a loan application, though, evaluate your finances first so you have a clear idea of what you can and cannot afford.
If you want better terms and more bargaining power, work on increasing your credit score and DTI ratio by first paying some of your existing debts. You may also consider paying more than the required 3.5% down payment to reduce the principal and interest of your loan.Once you’re confident that an FHA loan is the right choice for you, reach out to an FHA-approved lender and work on getting pre-qualified.
