An FHA loan is an excellent option for people who want to purchase a home but don’t have a lot of cash or flawless credit. The Federal Housing Administration guarantees these loans offered by thousands of private mortgage lenders across the United States. You can find an FHA-approved lender on the US Department of Housing and Urban Development website.
Benefits of an FHA loan include:
- Down payments as low as 3.5%
- Competitive interest rates – FHA loan rates are often slightly lower than conventional market rates
- Higher debt-to-income (DTI) ratios
- Lenient credit standards – 580 credit score required for a 3.5% down payment
Who Qualifies For An FHA Loan
FHA loan approval is often easier than a conventional loan. The federal government guarantees the loans, so lenders can offer reasonable rates and terms. Qualifications for approval include:
- Credit score: A minimum 580 credit score is required for a 3.5% down payment. You need a 10% down payment if your score is below 580, and the minimum credit score is 500. On the other hand, conventional loans require at least a 620 credit score.
- Down payment: A 3.5% down payment is available with at least a 580 credit score. But you need 10% if your credit score is below 580.
- Loan-to-value ratio (LTV): LTV is the ratio between the size of your loan and the property’s market value. FHA loans require a 3.5% down payment, so the LTV needs to be no more than 96.5%.
- Debt-to-income ratio (DTI): The DTI is how much of your gross monthly income is used for debt payments. Most FHA lenders want to see a DTI that isn’t higher than 45%. However, lenders may approve a DTI of 50% if you have excellent credit or a bigger down payment.
How To Apply For An FHA Loan
- First, meet minimum FHA loan requirements: minimum credit score of 580, no recent bankruptcies, 3.5% minimum down payment, pay stubs, and tax returns to prove income. Also, the home must be used as your primary residence.
- Select an FHA-approved lender. Some lenders have different credit and down payment standards than others. If your credit score is under 580, it may be necessary to shop a few lenders.
- Collect basic loan application information for the FHA loan application: Full name, Social Security Number, driver’s license, income information, employment history, address, purchase price, and amount of down payment. You also will need tax returns and bank statements during the pre-approval process.
- Get pre-approved for an FHA loan. Optional but highly recommended. Being pre-approved means the FHA lender reviews your financial details to decide if you qualify. They will also tell you how much you are eligible for.
- FHA inspection and appraisal. The home must meet minimum FHA standards and be appraised as part of the approval process.
- FHA underwriting and approval. This is when the loan is finalized and, hopefully, approved. Therefore, it’s essential to provide any additional documentation the lender asks for.
- Loan closing. This is where you sign the loan documents and pay closing costs. You’re a homeowner – congratulations!
Now you understand how to apply for an FHA loan, so it’s time to look for a home. If you’re looking for your dream home on Beautiful Big Island, contact Jade Halama today.