FHA Loan is a federal assistance mortgage loan insured by the Federal Housing Administration. FHA is a United States government agency created as part of the National Housing Act of 1934. The creation of the Federal Housing Administration successfully increased the size of the housing market.
FHA is not a mortgage lender, but instead guarantees mortgage loans, making the borrower much more likely to get approved for the loan through a lender. FHA guarantees mortgage loans for borrowers who may not be able to get approved for a loan otherwise because of low income, low down payment or poor credit score.
An FHA guarantee means that lenders will receive funds from FHA if the borrower defaults on the loan and the home is foreclosed. This makes the borrower more appealing to lenders who normally might not approve the borrower for a loan.
How to obtain a FHA loan
The first step in obtaining an FHA loan is to contact several lenders or mortgage brokers and ask them if they originate FHA loans. Not every mortgage lender accepts FHA loans. As each lender sets its own rates and terms, so shop around. Borrowers must apply for mortgage loans and meet the credit and income qualifications set forth by the lender for FHA loans.
Second, the potential lender assesses the prospective home buyer for risk. Factors, such as your debt-to-income ratio, monthly income and expenses, and payment history on other debts, are used by lender to make decisions regarding eligibility and terms for a loan.
Finally after receiving FHA and lender approvals, the borrower closes on the mortgage loan and owns the home. FHA loans can be refinanced, also you can refinance a traditional mortgage into FHA loan.
FHA Down Payment
A borrower’s down payment may come from a number of sources. The 3.5% requirement can be satisfied with the borrower using their own cash or receiving a gift from a family member, their employer, labor union, non-profit or government entity.
FHA Mortgage Insurance
The FHA insures only a limited range of mortgages provided by FHA-approved lenders. PMI insurers service mortgages of the conventional market. PMI is required if a homebuyer borrows more than 80% of the property’s purchase price in one loan; the FHA insurance is required for any FHA mortgage, irrespective of the size of the down payment provided.
FHA’s mortgage insurance programs help low and moderate-income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages lenders to make loans to otherwise credit-worthy borrowers and projects that might not be able to meet conventional underwriting requirements.
Required Documentation For FHA Loan
- A two year history of employment. W-2, 1099 or tax returns
- Credit Scores normally need to be above 620 for conventional financing
- State Driver’s License or ID along with a copy of your Social Security card required
- Debt Ratios should be below 40% housing and 45% total
- Chapter 7 Bankruptcy discharged greater than 24 months or Chapter 13 twelve months with perfect pay history
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