The Department of Housing and Urban Development (HUD) is the parent agency that offers housing assistance to U.S. residents. Several branches of the HUD exist, including the Federal Housing Administration (FHA). The FHA is a mortgage insurance organization. The primary objective of the FHA is to provide access to affordable housing through single-family properties or affordable rental opportunities to citizens in need, such as disabled and/or elderly citizens.
If you want to purchase a single-family home, you can potentially apply for a standard home loan. Generally, the credit requirements for standard loans may make obtaining a property nearly impossible. Your income level may affect your ability to afford standard loan payments as well. Below is more information on how an FHA loan allows you to purchase the home you want at an affordable rate.
The Definition of an FHA Loan
An FHA loan is not provided directly from the FHA. Instead, these types of loans are provided by lenders who are approved by the FHA. To get such a loan, you must apply at an FHA-approved lending institution. These lending institutions include local credit unions and banks offering FHA loans. However, not every local lender has FHA-approved loans available. Moreover, it may take time to locate an institution in your area that offers such loans.
Overall, an FHA-approved loan is beneficial because it is ensured by the FHA, which is a government organization. It is easier for a lender to offer an FHA-backed mortgage to you even if you are considered a high-risk borrower. The lender is not actually taking the same large risk associated with issuing a non-FHA loan. If you do not make your mortgage payments on an FHA-backed mortgage, the lender knows losses are recoverable through the FHA.
FHA Loan Types
Before applying for an FHA loan, you have to take into consideration the various available options. Each type of FHA loan is designed for a certain purpose. Therefore, you must select the type of loan assistance that is best suited for your demographic and particular needs. The available FHA loan types are:
Primary Differences Between Conventional Loans and FHA Loans
Conventional loans and FHA-backed loans differ in several ways. While conventional loans typically offer more choices in loan durations, FHA loan periods typically last 15 to 30 years. Another difference is that FHA loans are easier to obtain because they only require credit scores as low as 500 for approval. This is a better requirement than the typical credit score of 620 that is required for traditional loans.
Another difference between conventional loans and FHA loans is the requirements for mortgage insurance that are attached to them. If you obtain a traditional mortgage, you do not have to purchase mortgage insurance unless your down payment is less than 20 percent of the total mortgage value. Alternatively, you must always purchase mortgage insurance on an FHA-backed mortgage. The upfront mortgage insurance premium (MIP) and annual MIP payments increase the total amount you must pay over time.
Despite its name, the annual MIP is paid on a monthly basis. The percentage paid as an annual MIP varies, as does the length of time you must pay it within. You may have to make annual MIP payments for the duration of the loan or only during a pre-determined number of years. This determination is made based on the amount of money you borrow compared to the total amount you pay for the home. This value is called the loan-to-value (LTV) ratio.
FHA Loan Limits
An FHA loan limit is the maximum amount you borrow when obtaining an FHA loan. Generally, the loan limit in each area is different. This amount is established using data regarding the cost of living in a particular area, as well as other factors. Consequently, the amount you borrow to purchase a home in a low-cost area is typically lower than the amount available when you purchase a home in a high-cost area.
This limit is a cash value borrowing cap. Overall, the FHA enforces a percentage value borrowing cap. This means that you can only borrow up to a certain percentage of the value of a home in the form of an FHA loan. If the amount is lower than the total cash value available to borrow with an FHA loan in the geographic area in question, the percentage value of the individual home takes precedence.
FHA Loan Credit Checks and Risk Assessments
When assessing your eligibility for an FHA loan, your lender examines your credit report. The FHA’s looser credit score requirement makes it easier to qualify for such a mortgage than a conventional home loan. Generally, the lender places more importance on other aspects of your finances. As an example, you must have a solid work history for at least the past two years. The lender uses this information to help make sure that you consistently meet your FHA loan payments.
Your lender will also examine the payment history for your debts. Moreover, paying your utility bills consistently makes you a better candidate for an FHA loan. If you have previously rented a living space, a history of making regular rent payments on time is also deemed favorable. Additionally, if you have filed for bankruptcy, you must have an established history of paying debts in a timely fashion after doing so.