After the Great Depression of 1929, few families were able to buy houses, and many who previously owned houses lost them for forced sale and foreclosure. The mortgage conditions were difficult to meet and loans were limited to 50% of the market value of the property. After three to five years of installment payments only, a final balance payment that was essentially the entire principal of the loan became due.
The Federal Housing Administration was established in 1934 to help the nation out of the depression and increase home ownership by making mortgages available to more people. The FHA program reduced payment requirements; qualified borrowers based on their ability to repay a loan (instead of who they knew); established the loan repayment schedule, in which both the principal and the interest payments are made each month; and introduced longer loan periods.
Today, the FHA offers mortgage insurance for single-family and multi-family mobile home loans made by FHA-approved lenders in the US and its territories. It is important to note that the FHA is a mortgage provider and not a mortgage provider: the FHA insures loans so that lenders can offer better deals. Many starting and returning home buyers may be eligible for FHA loans that typically have lower down payments, reasonable credit expectations, and more flexible income requirements. Here we look at the main reasons why an FHA loan might be suitable for you.
If you have not saved much money for a down payment, an FHA loan can be a good choice. The down payment on an FHA loan can be as low as 3.5% of the purchase price of the house. So, for example, if the purchase price is $ 200,000, you could get a mortgage with as little as $ 7,000 down ($ 200,000 X 3.5% = $ 7.000). You pay a 20% discount (or $ 40,000 for the same $ 200,000 home) on many conventional mortgages. For some people, an FHA mortgage can be the difference between becoming a homeowner and continuing to rent.
Low down payment costs nothing. Whether you have a conventional loan or an FHA loan, you must pay a mortgage insurance if you have spent less than 20%, either in the form of a private mortgage insurance (PMI) for conventional loans or a mortgage insurance premium (MIP) for FHA- loans. (FHA loans also require a one-off payment in advance when the loan is issued.) The rate that you pay depends on the duration of the loan, the loan-to-value ratio (LTV) and the size of the loan.
Recent changes affect how long borrowers are required to pay MIPs on FHA loans. If your FHA loan originated before 3 June 2013, the FHA must pay the full five-year MIP before they can be withdrawn if your loan is longer than 15 years, and then only if the balance is 78% of the loan . the original price of the house (the purchase price stated on your mortgage documents).
For loans that arose after on or after 3 June 2013, new rules apply: if your original LTV was 90% or less, you owe the MIP for 11 years or until the end of the loan, whichever comes first occurs; However, if your LTV was higher than 90%, you pay the MIP for the entire duration or 30 years. This is more expensive than PMI for a conventional loan, which can usually be canceled when your equity in your home is around 20%. See How you can get rid of private mortgage insurance for more information.
High debt / income ratio
A debt-to-income ratio (DTI) measures the amount of the debt that you have in relation to your total income. Lenders, including mortgage lenders, use DTI as a way to assess whether you are able to manage the payments you make monthly and to repay the borrowed money.
To calculate your DTI, add up your total recurring monthly debt (including mortgage, student loans, car loans, child benefit and credit card payments) and divide this by your gross monthly income (which you earn each month before taxes and other deductions). For example, if your total recurring monthly debt is $ 2,000 and your gross monthly income is $ 6,000, your DTI would be 33% ($ 2,000 ÷ $ 6,000 = 0.33 or 33%).
A low DTI shows a good balance between debt and income. Lenders such as the number are low because borrowers with a lower debt-in-income ratio are more likely to manage monthly debt payments. A high DTI, on the other hand, shows that you have too many debts for your income.
In general, 43% is the highest DTI you can have and you still get a conventional mortgage. The FHA, however, has some flexibility and allows certain borrowers to get DTIs of 56% or 57%, for example those who can make a large down payment, or those who view significant savings and a solid credit history. If you have the same gross monthly income of $ 6,000 from the previous example, your total recurring debt may be as high as $ 3, 420 to be eligible for an FHA loan, compared to $ 2, 580 for a conventional loan.
Lower credit score
A credit score is a figure that lenders can use to evaluate your credit report and estimate how risky it is to provide credit or lend you money. Lenders receive your credit score from the three major credit rating agencies – Equifax, Experian and TransUnion. The most used credit score is the FICO score, which is based on five factors:
- 35%: payment history
- 30%: amounts due
- 15%: length of credit history
- 10%: new credit and recently opened accounts
- 10%: types of credit in use
In general, the credit requirements for FHA loans are more flexible than those for conventional loans. Although other factors are taken into account, a credit score of at least 580 is required to receive maximum funding. If your credit score is between 500 and 579, you will probably still get Deirdreijk approval (depending on the other factors), but you will have to make a larger down payment (such as 10%).
If you have a non-traditional credit history or insufficient credit, you can still qualify for an FHA loan if you meet certain requirements; in fact, your lender may approve an FHA loan even if you don’t have a credit score. These situations are evaluated on a case-by-case basis (consult your lender for details on your specific situation).
The bottom line
The FHA insures home loans throughout the US and its territories, including Guam, Puerto Rico and the US Virgin Islands. To be eligible for an FHA loan, the property must be your principal residence and be occupied by the owner (ie you must live there). Many starting and returning home buyers may be eligible for FHA loans, even with lower credit scores and / or higher debt-to-income ratios than you need for a conventional mortgage.
There are many types of FHA loans and the rates and exact requirements can vary per lender. A mortgage is a long-term financial commitment and it must be ensured that you understand the various available loan products and your specific options before you make a decision. Read Is an FHA mortgage still a bargain? before you commit.