Despite the fallout from the mortgage crisis that developed a few years back, there are still many opportunities for people with less-than-stellar credit to obtain a mortgage to buy a home. The Federal Housing Administration (FHA) loan program may be an option for many individuals who thought their dream of owning their own place wasn’t possible. Here are the basics on FHA loans to help you determine if you’re eligible and how the program can benefit you.
FHA Loans 101: This type of mortgage is backed by the FHA, though the funding doesn’t come from that agency. In a nutshell, the FHA insures a loan for a borrower that secures a mortgage through an approved lender. The lender is motivated to provide the loan because the risk of loss is less if the borrower defaults. The FHA loan program enables people to own a home, despite the fact that they might otherwise not qualify – and interest rates are quite reasonable compared to traditional loans.
Why to Consider an FHA Loan: There are several advantages that make an FHA a smart financial move in buying a home:
- These mortgages require a relatively low down payment (3.5%);
- Below average credit ratings are not a bar to obtaining a loan;
- An FHA loan can be assumed by, i.e., transferred over to, the buyer if you decide to sell; and,
- You can borrow up to $270,000 or more for your new home, depending on the location. In certain cities where homes are more expensive, you can obtain a loan that coincides with real estate prices in that region.
Eligibility Requirements for an FHA Loan: In order to qualify for an FHA loan, you must:
- Have worked for the same employer for two years prior to applying;
- Be a resident of the U.S., with a valid Social Security number;
- Be borrowing funds to purchase a primary residence, not for investment purposes;
- Borrow from a lender approved by the FHA; and,
- Have a certain credit score, at least 580 to qualify for the 3.5% down payment loan structure. If your rating is 500-579, your minimum down payment amount must be 10%.
These are some of the general eligibility factors, so keep in mind that there are additional requirements you’ll need to meet.
Other Factors to Bear in Mind: An FHA loan does have some drawbacks, so it’s wise to discuss your circumstances with a lending professional. For instance, you’ll be required to pay an upfront mortgage insurance premium based upon the amount borrowed. This can be rolled into the mortgage or paid at closing, however.
If you thought that owning a home wasn’t in the cards because of below average credit or other issues, you’re not alone. But the FHA loan program has enabled many people to become homeowners, even despite being turned down because of a poor financial history. For more information on the FHA loan program and how it can help you buy your dream home, consult with a professional mortgage lender about the process.