What is a FHA Loan

Posted by Kayla Wilson on Friday, March 20th, 2020 at 1:20pm

Thinking about buying a house but are unsure about financing or where to get started, below is some information on FHA loans, the process, the requirements, and guidelines. 
FHA loans are Federally Backed by the Federal Housing Administration a section of Housing and Urban development, given the low down payments of 3.5% and the required credit score of 580 associated with FHA loans it is easy to see why it is a popular choice with first time home buyers and for those unable to make a large down payment.
A FHA loan doesn't mean you actually borrow money from the federal government for your house. what happens is you secure a mortgage using a lender that is approved by the FHA.  You are still borrowing money from a traditional financial institution, from their list of qualified lenders. FHA then “guarantees” your loan, which gives you the added credibility to overcome the added risk the lender bears from a lower down payment. In exchange, an FHA loan necessitates that you pay two different types of mortgage insurance, Upfront Mortgage Insurance Premium (UFMIP) and Annual Mortgage Insurance Premium.
FHA loans are not for every home, it has to be a loan for your primary residence.   You can't get an FHA loan for a second home, vacation home, or investment property. Also FHA loans are only available for one to four unit properties, so if the home you're looking at is more units than this, you will need to find a different type of loan.
FHA loan limits are specific to individual states and even individual counties. This means that you can't get an FHA loan on a house whose total sale price is above the FHA loan limit in that county. An FHA loan limit in a rural town would be far lower than the loan limits in a bigger city or more expensive area.
Qualifying for a loan depends on your DTI (Debt to Income) Ratio, you want about 31/43 DTI ratio to qualify for an FHA loan. This means that your potential mortgage payment should account for no more than 31% of your total monthly income (front-end DTI)  and your total debt including your mortgage payment should account for no more than 43% of your gross monthly income (back-end DTI).
If you want to know your specific eligibility for a certain loan, the only way to know for sure what you qualify for is to talk to a mortgage specialist.
Here are some of the main factors that a FHA mortgage specialist will look at:
  • The length and stability of your employment history
  • Your ability to pay a 3.5% (or 10% with a lower credit score) down payment
  • You must be legally able to live in the US
  • You have to be over 18
  • You should have no higher than a 31/43 debt to income ratio
  • Credit score of at least 580 (or 500 to 579 with a 10% down payment)
  • At least two years out of back bankruptcy (if applicable)
  • 3 years out of foreclosure with re-establish good credit (if applicable)
  • The property must be FHA loan eligible and pass appraisal standards
The FHA inspection and appraisal are mandatory and an important part of the process when applying for an FHA loan.  Buyers should look at it as an added measure of protection when buying a home. Sellers should plan ahead in preparation for an FHA inspection by making obvious and significant repairs before listing the home for sale.
An FHA inspection is an in-depth analysis of the home. It is looking for structural issues, hazards, and makes sure the home is in good livable condition while meeting the FHA minimum property standards. The FHA inspection also verifies the true market value of the home.
A standard non FHA appraisal simply verifies that the home value is at least as much as the selling price by determining the true market value. Although the appraisal protects the buyer, its true intent is to protect the lender. An FHA insured loan will require you to have the FHA inspection and appraisal. 
FHA appraisal standards as required by HUD are as follows:
  • Must be a complete marketable property
  • Adequate heating system 
  • Clear of any lead based paint
  • No exposed electrical wiring 
  • Full exterior walls that are undamaged 
  • No hazards in the home 
  • Quality Construction
  • Proper drainage
  • Quality roof not in need of repair 
  • Safe and public access to the home 
  • Safe drinking water 
  • Crawl spaces must have natural ventilation
  • Gas, water, sewage and electric utilities available 
FHA has specific requirements for all home loans regarding wells and septic systems,  FHA require Drinking water wells must be 50 feet from any drain field including abutting property , and have a bacteriological test from a water management or county health dept. that can test the water for pollution 

If you are a first-time home buyer or have lower amounts of capital to devote to a down payment, this could be an excellent home loan choice for you. If  you are a first time home buyer, there are a lot of good reasons why an FHA loan would be the better option for you. 
I hope that you learned something and if you have any questions please send me a message and let me know. 

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