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Discover FHA Loans and How They Work

An FHA loan is a homeownership arrangement by the Federal Housing Administration (FHA) in which it issues loan insurance to expand homeownership opportunities. The agency gives mortgage insurance to FHA-certified lenders to protect them against losses incurred on FHA loans. For example, if a homeowner defaults on a loan, the FHA cushions the lender against the loss. The borrower bears all the mortgage insurance expenses. The FHA is an arrangement of the US Department of Housing and Urban Development (HUD).

How Do FHA Loans Work?

The FHA loans are often available in fifteen and thirty-year terms with fixed interest rates. The agency offers flexible underwriting standards, which allow borrowers with no pristine credit, high income, or cash savings to become homeowners.

This coverage shields the lender from a loss should the borrower default on loan. However, it comes with a catch: the homeowner must pay FHA mortgage insurance. For all FHA loans, the borrower must pay two mortgage insurance premiums:

  • Upfront mortgage insurance premium: This premium is often 1.75 percent of the loan amount, which the borrower pays after getting the loan.
  • Annual mortgage insurance premium varies between 0.45 percent and 1.05 percent, based on the loan term. It also depends on the loan amount and the initial loan-to-value ratio (LTV). Usually, this premium is divided by 12 and paid in equal monthly installments, according to the loan term.

After 11 years of continuous payment of FHA mortgage premiums, most borrowers can have their premiums canceled. This is based on the assumption that they have financed 90 percent and made a 10 percent down payment. However, FHA loans with an LTV bigger than 90 percent must carry the insurance to the full term.

Qualification for an FHA Loan

Homeowners who wish to take FHA loans must meet the following guidelines:

  • Must have a verifiable employment history for the last 24 months
  • Must have a FICO score between 500 and 579 with 10% down or a FICO score of 580 or more with 3.5% down
  • Must have verifiable income through bank statements, federal tax returns, and pay stubs
  • Must use the loan to finance the primary residence
  • An FHA-approved appraiser must appraise the property if it meets the HUD standards
  • Must have monthly mortgage payments of no more than 31 percent of the gross monthly income

How to Get an FHA Lender

Borrowers of FHA loans must identify reliable FHA-certified lenders. Different lenders offer different rates, costs, and underwriting standards. Borrowers can get the loans through major banks, credit unions, community banks, or independent mortgage lenders. 

To apply for an FHA loan, a borrower needs the following key steps:

  • Work with a specific budget: Before applying for an FHA loan, borrowers must know how much they can afford to spend on a home. Therefore, a borrower must work with current income, expenses, and savings. This can help in estimating monthly payments according to different home prices and different amounts of down payment.
  • Compile necessary documents: Borrowing a large amount of money comes with a huge financial responsibility. Before applying for an FHA loan, a borrower must have all the required documents ready, including two years of tax returns, a driver’s license, two recent pay stubs, and complete statements of assets. This includes checking account details, 401 (k), savings account, and any other place where the user holds money.

Finally, yet importantly, borrowers need to compare their offers. They can do this by getting preapproved with several lenders to compare different rates and terms. This ensures that they get the best deal. At Blake B Mortgage, we’ve been helping our customers get the home of their dreams for many years. Get in touch with us today to learn more.

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