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FHA Guidelines for New Home Loans

If you want to get a home loan and do not have a 20% down payment available, what should you do? Fortunately, the Federal Housing Authority (FHA) has you in mind! This federal agency insures mortgages which are paid for by borrowers' private mortgage insurance. This means that the lender on the loan is protected if you default. One of the reasons people like government home financing is because FHA loan requirements are more relaxed credit standards than traditional underwriting. It also doesn't hurt that they ensure very low interest rates and much more flexible qualification requirements and make-sense loan guidelines than conventional lenders. Before you think about applying for a mortgage, consider these FHA guidelines:

#1 So-So Credit OK

A major benefit of an FHA mortgage is that the minimum credit score required for approval is quite low. Generally, you will need at least a 620 or 640 credit score to be approved by many FHA companies. In some instances if your credit score is under 620, you will need to have a 10% down payment available. Note if you have credit under 500, you are usually not eligible. If your score is 640 or higher, all FHA lenders will work with you. If you have a fico score between 500 and 600, there still may be hope, but check with government approved lenders that offer mortgage loans for bad credit.

#2 Minimum Down Payment is 3.5%

Most borrowers are required to put down only 3.5% to qualify for an FHA home loan. This is a major attraction that allows millions of people to get a home loan who could not otherwise qualify. You can use your own savings to pay the down payment, but you also may use gift funds from a family member.

#3 Closing Costs Can Be Covered

Whichever home loan you get, you will always need to pay closing costs. Every home loan has costs for appraisals, credit reports and title costs. But with an FHA loan, you can ask the lender to pay these costs for you. Or, you can ask the seller of the property to pay some of them. Some sellers will do so because they need to get the house sold.

Lenders usually charge you a higher rate if they pay closing costs. Still, if you are having trouble coming up with several thousand dollars to close the loan, it could be worth it.

#4 Lender Must Be Approved by FHA

Remember that FHA itself is not a lender. It is a government agency and insurer of loans. Your loan must be underwritten by a lender approved by FHA. Not every lender approved by FHA will offer the same rate and terms, so you will need to look around for best results. The important thing is that these government endorsed companies will follow FHA loan guidelines. One of the reasons companies like to have access to these government insured loan because the FHA loan rates are so great.

#5 Mortgage Insurance Is Required

There are two mortgage insurance premiums that are mandatory on all FHA loans. The first one is a premium that you pay up front when you get the loan. It is for 1.75% of your loan amount. You can wrap this into your mortgage if you like. The other is an annual mortgage premium that you pay each month. It will vary depending upon how long your loan is, how much you are borrowing and what your initial loan to value ratio is. Learn how FHA mortgage insurance works.

#6 You Can Borrow For Repairs

Another major benefit of an FHA home loan is that you can finance some of your repair costs. This is called a 203(k) loan. The advantage here is that the loan amount is never based upon what your house is worth. Instead, it is based upon what the value will be after the repairs are done. This loan allows you to borrow up to $35,000 for repairs.

It is very advantageous to borrow this money as part of your loan because the interest rate will be much lower than with any unsecured credit line.

#7 Financial Relief Available

If you borrow from an FHA-approved lender, you may have options if you cannot pay your loan for some reason. If you have suffered a serious financial issue and cannot pay, you may be able to qualify for a forbearance period. Or, a loan modification may be available.

#8 Debt to Income Ratio Is Flexible

Current limits for house relate debt is 31%. For total debt, the limit is 43%. Those are only guidelines, however, and there are options if you have ratios that are higher.

You may be able to qualify for higher ratios if:

  • You have more than three months of mortgage payments in savings
  • You have good credit above 700
  • You have a good payment history on past mortgage debt obligations

#9 FHA Mortgage Limits

Did you know that the Federal Housing Administration insures higher loan amounts than Fannie and Freddie in some high cost regions of the country? When getting up to speed on current FHA guidelines, don't forget to consider the FHA loan limits for the areas you are looking to buy a home in. Check the HUD managed loan limits for FHA mortgages here.

If you have limited down payment money available and your credit is so-so, getting an FHA mortgage can be a great deal. You can get a loan with just a 3.5% down payment and still have a very good interest rate. As long as you are able to document your income and show that you have reliable means of paying your mortgage each month, you should be able to get a FHA home loan.

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