Federal Housing Administration (FHA) mortgage loans make it possible for buyers who may not qualify for a traditional mortgage to purchase a home. This is especially helpful as, since the housing crisis in 2008, lenders have tightened their home loan requirements. First-time home buyers have been particularly affected by these changes. If you have had credit challenges in the past, or can't afford a substantial down payment, an FHA loan might be a good option. You must find an FHA-approved lender to work with your loan request.
Credit Requirements
FHA loans may be more lenient towards issues you may have had in the past with credit. A previous bankruptcy filing may not a problem, as long as it was discharged more than two years ago. There may be some exceptions that could allow you to qualify earlier.
A borrower who's demonstrated reestablished credit and is three years past foreclosure may also be eligible. Like bankruptcies, there are some exceptions to the waiting period after a foreclosure, based on your circumstances.
If you've had a couple of late payments, followed by good payment history, you may still be eligible for an FHA loan. Their policy on collections also may be more lenient than on other loan options. However, if you have a federal lien, such as a default on your student loan, this may likely disqualify you from the FHA loan program.
Down Payment Requirements
Another advantage for first-time home buyers is the lower down payment requirements with an FHA loan. A 3.5% down payment may be all that is needed. That's a $7,000 down payment on a $200,000 home. A lower credit score range could bump up the down payment requirement to 10%. On that same $200,000 home, that would be a $20,000 down payment, which may still be feasible with a good savings plan.
The down payment may also be a gift from a friend or family member. There are specific guideline requirements for qualifying gift funds. Talk to your lender to clarify the verification and paperwork involved when using gift funds
Debt-to-Income Ratio
The FHA also looks at your debt-to-income (‘DTI’) ratio to help ensure that you're able to cover your recurring debts when you purchase a home. There are two DTI ratios considered:: the ‘front-end’ DTI, which computes all the monthly debt related to housing (property taxes, mortgage payments) and the ‘back-end’ DTI that includes both housing and other monthly recurring debt (mortgage payments, credit cards, student loans, etc.). These recurring monthly debt payments are weighted against your gross monthly income to determine your back-end and front-end DTI.
Mortgage Insurance Premium
Mortgage Insurance (MI) will be required with an FHA loan. You must pay an annual fee, in addition to the upfront mortgage insurance premium. Unlike other closing costs, you can't roll the MI fee into the loan. You can, however, potentially cancel the annual mortgage insurance premium at a certain point, dependent on the amount of the down payment, the term of the loan and the date upon which the application was taken. Review the FHA's website for more details. It's also possible to later remove MI requirements by refinancing the FHA loan to a traditional loan.
Other Considerations
There are guidelines that the FHA has concerning the type of home you can purchase with an FHA loan. It's possible that if the house needs renovations, it may not qualify. You also must be the primary person who will be occupying the home, and it must be your primary residence.
Here's a calculator that can help you determine what your FHA loan payments will be based on your purchased price, down payment, term, and interest rate. Taking out an FHA loan as a first-time buyer could be a viable option for you. If you still have questions about FHA loans or want to know what other loans might be available to you, you can talk to one of NASB's experts at 855-465-0753 or download our free NASB eBook, So You’re Thinking of Buying Your First Home?
