What Is An FHA Home Loan and How Does It Work?

Many people become overwhelmed at the thought of buying their first home. There are tons of factors to consider and things to learn before purchasing a property. One of the most common concerns is how to raise enough money to make a down payment. Luckily, there is an assistance program in place for first time home buyers. The Federal Housing Commission offers a special loan that all first time home buyers should take full advantage of.

 

What is an FHA Loan?

An FHA home loan is a mortgage that is given to first time home buyers. These loans are backed by the Federal Housing Commission in order to entice a broker into taking a chance on a new homeowner. These loans typically allow the buyer to place a down payment that is only 3.5% of the purchase price. This is in stark contrast to the 20% that many other mortgage products require.

 

FHA loans are designed to get more people to buy and keep their first piece of real estate. After the mass amount of foreclosures in the 1930s, the FHA needed a way to revitalize the real estate market. By giving a brokerage more insurance, they give brokers the freedom to approve more loans. By making the down payment so low, they lower the barrier of entry for weary potential homeowners. The result has been a steady stream of people entering the housing market for the first time.

 

Requirements for an FHA Loan

Like all loans, the recipient must qualify in order to receive the money. The most basic requirement for securing an FHA loan is to have a credit score of 580. This allows plenty of leeway for young people with smaller credit histories. The borrower must also have a steady employment history. Working at the same place for at least two years helps the borrower's approval chance immensely. FHA loans are also only given out to primary residents. The borrower must live in the house for at least one year before making it a rental.

 

Before a loan is given, the property must be appraised by an FHA-approved appraiser. The house must meet all standards in order for the loan to be approved. Next, the borrower must have a front-end ratio of at least 31%. This means that the mortgage payment plus HOA fees, property taxes, mortgage insurance, and homeowners insurance must not exceed 31% of the loan recipient's gross income. Certain states also have their own unique requirements. Always check the specific state laws for FHA loans in the area in question.

 

Why Someone Would Consider an FHA Loan

The biggest reason to consider an FHA loan is how easy it is to qualify. Although the list of requirements is rather long, each one is rather easy to achieve. The low down payment is great for anyone who doesn't want to spend years saving up just to get their foot in the door. The borrow can also have a relatively low credit score compared to other loan types. Young people with short credit histories will find this factor very appealing. FHA loans are also assumable. An assumable loan allows the owner to sell the house before fully paying it off. The next owner can assume the loan and pick up where the previous owner left off. This prevents the original owner from being stuck in one place for the next 30 or so years as they pay everything off.