A good option for moderate-income buyers who can't afford a large down payment is a Federal Housing Administration loan. Credit requirements are easier to meet and lenders can offer lower mortgage rates because the FHA insures the mortgages. If you're thinking about an FHA loan, there are seven things every potential homebuyer should know about these loans.
1. See an FHA-Approved Lender or Broker
Bankrate.com recommends customers chose an FHA approved lender or broker. Visit the HUD website to find a list of approved lenders in your area. You can also check the HUD site to find out how much you will be able to borrow. The amount can vary by the state where the property is located.
2. FHA Loans Have Specific Property Qualifications
In addition to borrowers meeting lender standards, your future home must also meet FHA qualification standards. USA Today says it's important to make sure any property you're considering meets the following criteria:
- Investment properties are not eligible.
- The property can't be a flip. You can't purchase a home less than 90 days after a prior sale.
- The title of the property must be in your name or the name of a living trust at closing.
- The loan must be your principal residence, and at least one borrower must occupy the property within 60 days of closing.
- An FHA appraisal includes a strict inspection, assessing a home not only on value but also on minimum property standards.
3. FHA loans have lower down payment requirements
Conventional lenders usually require a 20 percent down payment. FHA-approved lenders can offer an FHA loan with as little as 3.5 percent down to borrowers who meet the credit requirements.
In addition, borrowers may also receive the down payment as a gift. Relatives, employers or a non-profit agency that offers down payment assistance are all approved sources, says John Councilman, federal housing chairman for the National Association of Mortgage Brokers. In addition, first-time buyers can also have a non-occupant co-borrower. For example, a recent college grad could purchase a home and if he needs credit help, a parent can co-sign the loan.
4. FHA loans are easier to qualify for
Borrowers with less-than-perfect credit can often qualify for an FHA home loan. Even if you have a bankruptcy in your history, you may still be able to qualify. The minimum requirement for an FHA loan is a FICO score of 500. A score of 580 or above will qualify you for the minimum 3.5 percent down payment. Scores between 500 and 579 will qualify but there is a 10 percent down payment requirement.
5. FHA loans can help you avoid foreclosure
The Making Home Affordable program helps borrowers who are suffering a financial setback. The Minneapolis Star Tribune says that homeowners in default on an existing mortgage may be able to help you reduce your loan payments and avoid foreclosure. There are also options to assist unemployed homeowners as well as homeowners who owe more than what the home is currently worth.
6. FHA Loans Help Disaster Victims
Hurricanes, tornadoes, floods, brushfires, earthquakes and other disasters can occur suddenly and without warning almost anywhere and are occurring more and more frequently. According to the Star Tribune, the FHA Mortgage for Disaster Victims program provides 100 percent financing through approved lenders for purchasing a new home or reconstructing homes severely damaged in a natural disaster.