What is an FHA loan and who qualifies?
FIRST-TIME buyers can apply for a Federal Housing Administration (FHA) loan to get on the property ladder. We explain what you need to know about it and who qualifies. A Federal Housing Administration loan is a mortgage that is insured by the government agency and issued by an FHA-approved lender. In other words, the mortgage is guaranteed by the FHA but the lender is the one giving the cash. The loans, which have been available since 1934, are designed for borrowers on a low to moderate income. They require a lower minimum down payment and lower credit scores than many other traditional mortgages. GETTING on the property ladder can feel like a daunting task but there are schemes available to help first-time buyers. Below we round up top options: Federal Housing Administration (FHA) Loans: The Federal Housing Administration (FHA) manages the FHA loans program. This may be a good mortgage choice if youre a first-time buyer because the requirements are not as strict as for other loans. Homeownership Vouchers: The scheme offers subsidies to use toward buying a home to low-income Americans who are first-time buyers. For more information, contact your local Public Housing Agency (PHA). Good Neighbor Next Door: Certain teachers, emergency workers and law enforcement officers can take advantage of the Good Neighbor Next Door program. It offers 50% off select properties. In return, you must commit to live in the property for at least 36 months. State programs: Plenty of states housing authorities offer help in the form of combined closing cost and down payment assistance programs with favourable mortgages rates. To find out what's available to first-time buyers in your area, get in touch with your state directly. Because the FHA will pay a claim to your lender if you default on the mortgage, the lender bears less risk than usual. However, you agree to take on some risk too by paying two mortgage insurance premiums (MIP). The upfront premium is set at 1.75% of the loan amount, while the rate you pay over the full mortgage term depends on how much you borrow. The FHA loans are for first-time buyers, but over-62's who've already paid off their mortgage or have a low balance can get the FHA reverse mortgage. This lets you convert a portion of the equity in your home to cash. To be eligible for the home loan, you must have a steady employment history for the past two years. Or if you're self-employed, you typically need two years of successful income and evidence of it too. You must also have a valid Social Security number, reside lawfully in the US, and be of legal age (according to your state laws) to sign a mortgage. Plus, to make sure the loans are affordable, there's a standard debt to income ratio of 43%. This means the total monthly debt repayments can't exceed 43% of what you earn each month. In 2021, you can borrow up to 96.5% of the value of the home with an FHA loan, meaning you'll need to make a down payment of just 3.5%. For example, if your property costs $340,000, you'll need to put down at least $11,900. To be eligible, you need to have a credit score of at least 580. If your credit score is below 500 and 579, you can still get an FHA loan as long as you can make a 10% down payment. With FHA loans, your down payment can come from savings, a financial gift from a family member, or a grant for down-payment assistance. For 2021, the floor limit for single-family FHA loans in most of the country is $356,362, up from $331,760 in 2020. For high-cost areas, the ceiling is $822,375, up from $765,600 a year ago. These limits are referred to as "ceilings" and "floors" that FHA will insure, and change each year depending on house prices. How to apply  The FHA doesn't offer the loans directly, so you'll need to apply through an FHA-approved lender. Most of the major banks and mortgage companies offer the loans though, so you should be able to find one pretty easily. After finding a lender, the next step is to submit a loan application. Many lenders let you apply online, although some will connect you with a loan officer to complete your application over the phone or via email. Since mortgage terms, rates and criteria vary between lenders, make sure to contact multiple lenders to compare offers. 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