What Is an FHA Loan?
Private lenders issue FHA loans that are backed by insurance from the Federal Housing Administration. Federal backing provides lenders with the reassurance they need to finance homes for buyers who might not otherwise qualify for a conventional mortgage or other available programs.
Unlike USDA and VA loans, this is not a zero-down mortgage program. Instead, homeowners are required to make a downpayment that is at least 3.5% of the total financed amount. Note that when homeowners include closing costs in the loan, this forms part of the total used for the down payment as well.
FHA loans are especially useful for first-time homebuyers, lower-income buyers, and people with lower credit scores. However, it’s not exclusively reserved for this demographic. Anyone who meets the qualifications can use a Rock Mortgage FHA loan to buy qualifying property.
Your Complete Guide to Securing an FHA Loan
The FHA Loan Process
1- FHA Loan Preapproval
A preapproval is a lender’s proof of agreement to finance a buyer, pending additional information. While not necessary for the house-hunting process, it does show realtors and sellers that you are serious about moving forward.
2- The House Hunt
In the past, most buyers relied entirely on real estate agents to show them available houses. Instead, roughly 50% of homebuyers now use online tools to find a home and then rely on an agent to provide access and close the deal. Consider the approach that works best for you
3- Getting Under Contract
The negotiation process is one of the most challenging aspects of securing your home. There is a lot of back and forth and posturing involved, but your real estate agent does most of the work. Once the seller accepts an offer, the house is now under contract, pending final sale.
5- Your FHA Loan Closing
The closing process sometimes includes earnest money and always involves the tying up of all loose ends related to the property. It involves a lot of paperwork, but your agent and/or attorney will walk you through the process. This ensures the title passes to you clean and clear.
4- FHA Loan Underwriting
This is when our Rock Mortgage underwriters request documents to support the information submitted with your preapproval application. Our goal is to prove that you are capable of meeting your financial obligations for the term of the loan.
The FHA Loan Eligibility Requirements
1- Credit Score
The FHA backs loans for homebuyers with a credit score as low as 580 if you plan to put a minimum of 3.5% down. If you are willing to make a down payment of 10% or more, then the FHA makes allowances for credit scores as low as 500.
2- Down Payment
Most lenders use the guidelines above to fund the loan for eligible homebuyers. However, if you have a good to excellent credit score, some lenders may be more lenient and offer 3% down payment minimums.
3- Bankruptcy Waiting Period
If you filed for Chapter 7 bankruptcy in the past few years, you might still be eligible as long as the waiting period has expired. The standard waiting period for this type of bankruptcy is two years after the debts were discharged.
4- Bankruptcy Explanation
Some Chapter 13 filers may get approved for a mortgage, even while proceedings are undergoing if they receive approval from the court’s trustee. Both Chapter 13 and Chapter 7 filers must also submit a full explanation of the bankruptcy with the mortgage application.
5- Additional FHA Loan Requirements
There are no income limits for FHA loans, but buyers must show an ability to meet their monthly obligations. This depends on a buyer’s debt-to-income ratio. Local housing prices may also determine how much a lender is willing to fund.
Common Questions Homebuyers Ask About FHA Loans
Should I make a more significant down payment?
Your down payment has an immediate effect on two important factors for your loan: how much risk the lender takes on and your monthly payments. The less you borrow, the lower the risk the lender assumes, which helps lower your interest rate. Even if you don’t have enough extra cash to make it into a lower interest rate bracket, you will notice a lower monthly payment for the same term of the loan.
Where can I get more money for a down payment?
There are several programs available for homebuyers in Texas, especially lower-income buyers and first-time homebuyers. These programs might provide grants to put toward closing costs or down payments. Do some research to see if there are any you are eligible for. Family and friends can also gift you money, but you must be able to document where it came from. You must also show that it’s not money you’re expected to pay back.
How long does a mortgage last?
Some lenders are more flexible with loan terms than others. The standard term length of a loan is 30 years. Some buyers successfully secure mortgages that are 20, 15, or even 12 years, but these are rare. Note that the shorter the term length, the higher the monthly payments. However, interest rates are often lower because paying off the loan faster leads to less risk for the lender.
What is a good debt-to-income ratio?
The best-case scenario is that you have no debt obligations or very few. This is rarely the case, so the FHA sets a standard requirement of a 31/43 ratio. This means that your home should not cost more than 31% of your gross income, and all your debt should not total more than 43% of your gross income. Ideally, you want to fall in the 28/36 ratio range to ensure your finances aren’t stretched too thin.
How do FHA loan rates compare to other available options?
FHA loans tend to carry lower interest rates than other types of loans. The Federal Reserve Board sets these rates and they depend on the state of the economy. Even so, many people later refinance to conventional loans to get rid of private mortgage insurance. FHA loans also carry the same interest rate types as other loans. So, depending on the lender, you might choose from a fixed-rate mortgage, adjustable rate, or a hybrid.