Mortgages that are guaranteed by the federal government provide a good alternative for people who can’t get approved for conventional loans because of their less-than-standard credit. Of these loans, the FHA loan of the Federal Housing Authority is one of the most patronized by people with imperfect credit and first-time homebuyers.
This is not to say that the FHA originates the loan. The loans are sourced through private lenders that are under the protection of the FHA, in case a borrower defaults on the loan. Because the mortgages that are issued under the FHA loan program have insurance from the government, they pose a lesser risk for the lenders. It is through this backing that lenders ease on their approval standards for this specific program.
FHA loans welcome homebuyers from all walks of life. Anybody who wants to take advantage of its less stringent qualification requirements, more relaxed underwriting guidelines, and lower down payment rates may apply for the mortgage program through FHA-approved lenders.
Anybody with a credit score of at least 580 may qualify for an FHA loan with only 3.5% down payment. Applicants with credit scores below the minimum may still be granted approval, but are required to put a more substantial deposit. There is also a debt-to-income ratio limit, which currently stands at 43%; this means your accumulated debts (including the mortgage) must not exceed 43% of your gross income.
As with most loans, families, and individuals who wish to qualify for FHA loan should submit all necessary documentation and comply with all the requirement set by both the lender and the FHA.
To qualify for the FHA mortgage, the applicant must:
- Apply for a loan that is within the set FHA limit of the county
- Meet the required minimum credit score, which is at 580, to enjoy the 3.5% down payment
- Come up with funds for the down payment and closing costs, which may be in the form of “gift funds.”
- Provide documents that support claims of stable employment such as W2’s, bank statements, and pay slips
- Purchase a property to be used as the borrower’s primary residence
The Biggest Downside of the FHA Mortgage
Even though FHA loans are so much easier to obtain than conventional ones, they are not as financially sound as they appear to be mainly because of the enormous mortgage insurance obligation that comes with them. Unlike most loans that only require a single premium mortgage insurance if the lender puts down less than 20% deposit, the FHA loan’s insurance is comparatively more expensive as it calls for two mortgage insurance premiums, paid throughout the life of the loan. It is in this aspect of the loan that many homebuyers begin to have second thoughts and ponder on whether to go on with it or take more time improving their credit scores to someday qualify for a traditional mortgage.
It is worth mentioning, however, that the FHA’s unique insurance policy has not deterred many applicants. Tens of millions of Americans are proud homeowners, thanks to this particular government-backed mortgage.