What Is An FHA Loan?
FHA loan is a mortgage loan, guaranteed by the Federal Housing Administration, an arm of the Department of Housing and Urban Development, and issued by a lender, approved by FHA. These loans are planned for low-income borrowers and require a lower down payment and lower credit requirements, making them popular with first-time home buyers.
How do FHA Mortgage Loans Work?
You will get a loan from an FHA-approved lender, like a bank or any other financial institution. The FHA does not lend you money for a mortgage but guarantees the loan known as an FHA-insured loan. The FHA will pay a claim to the lender if you default on the loan, so the lender bears less risk.
5 Types of FHA Loans
The FHA offers five different types of loan programs.
1. Home Equity Conversion Mortgage
HECM is a reverse loan program specially planned for seniors aged 62 or older and converts the equity in their homes to cash. You can withdraw the funds, either as a line of credit or a fixed monthly amount.
2. FHA 203(k) Improvement Loan
This one loan enables you to get money for both home purchases and home repairs and renovations.
3. FHA Energy Efficient Mortgage
This program is similar to the FHA 203(k) Improvement Loan program, upgrades that can lower your utility bills, such as installing new solar or new insulation.
4. Section 245(a) Loan
A Graduated Payment Mortgage is a program for borrowers with lower first monthly payments who expect their incomes to increase.
5. Traditional Mortgage
A mortgage used to finance a primary residence is a Traditional Loan.
What Documents Required to Apply for an FHA Loan?
- Tax returns from the past two years
- W2s from the past two years
- Bank statements from the previous 60 days
- Financial statements for other assets.
- Original paycheck stubs.
- Proof of disability income or social security.
- Name and address of your two years old employers.
FHA Loan Requirements 2021 to Get Approved
If you’re likely to get approved for an FHA mortgage, here is what you can expect
- FHA-approved lender.
- Constant employment history with proof.
- Two years work history for the same employer or self-employment history
- Solid work history for the two years leading self-employment.
- A valid Social Security number.
- To sign a mortgage, be of legal age.
- Owner-occupied and principal residence.
- Your front-end ratio needs to be less than 31% of your net income.
- Your back-end ratio should less than 43% of your gross income.
- Minimum down payment of 3.5% with more than 580 FICO credit scores.
- 10% down payment of FICO score between 500 and 580.
- Mortgage Insurance Premium
- Less than 43% Debt-to-Income Ratio
- 5% or lower Loan-to-value ratio
- 2% and 5% of the loan amount closing costs, which are lender and third-party fees.
- Debt-to-income ratio percentage of your gross monthly income, and you are allowed to spend up to 31% of your gross monthly income on the house payment shouldn’t exceed 45%.
How to Apply for an FHA Loan?
Applying for an FHA loan is pretty simple. First, hold all your financial documents before starting the application process.
1. Find a lender
The first step is finding an FHA-approved lender for an FHA home loan from banks or mortgage companies, big banks, credit unions, or local lenders.
2. Apply for an FHA loan
Apply online and submit a loan application or connect with a loan officer to complete your application over the phone or via email.
3. Provide basic details
Provide the following basic personal information and property details to start your mortgage application
- Full name
- Social Security Number
- license or ID copy of your driver
- Income information
- Employment history
- The property address
- Purchase price of the property
- Down payment amount
4. Compare Loan Estimates
The Loan Estimate is a standard form used by all lenders to keep the loan process transparent. It provides a Loan Estimate within three business days after submitting a loan application. The LE includes information on the loan term or loan type.
FHA Loan Application Processing Timeline
The timeline from application to closing with an FHA loan takes between 30 days and 60 days, and your loan file goes through underwriting and underwriter review:
- Your current bills and payments
- Your bank statements to confirm the down payment and closing costs.
- Your previous tax returns and W2s statements
- Your recent pay stubs.
- Evaluation of your home’s current market value.
Benefits of FHA Mortgage Loans
- FHA loans are federally-backed loans planned for those people who have below the average credit scores.
- Require a lower down payment and a lower credit score.
- Issued by lending institutions and FHA-approved banks.
- Bankrupt persons who qualify for an FHA loan are asked to purchase mortgage insurance to ensure the guarantee of the FHA.
The FHA Home Affordable Modification Program will help you in any genuine financial issue with the loan relief program. However, FHA loans are not for everyone and do not help those with less than 500 credit scores and not potential homeowners.