If you have too much debt to qualify for a loan or a conventional mortgage, you may consider sidelining yourself to FHA loan. The Federal Housing is a division that was created to help moderate or low-income families borrow money to get home.
But here’s the point:
FHA loans are especially important when compared to other types of mortgage. They are affordable making them very easy to qualify for. Due to these and some several other factors, they are mostly considered by many people.
7 Steps To Getting An FHA Loan
Basically, these loans are meant to help low-income families but that doesn't mean that you can't take advantage of this free opportunity.
Keep in mind:
FHA loans are not the perfect loans out there. However, as you are going to find out, they are a great fit in some situations. Leaving aside all another attracting factor, they make it easy for you to acquire a property. However, keep in mind that the benefits have some trade-offs.
Let’s look at it in detail:
Step 1: Qualifying For The FHA Loans
It is simple, very convenient and you are going to like it. First up, the FHA loans for most people are not that strict. This is when compared with the normal loans. There are requirements that you need to meet if you are to qualify for the loan. However, to loosen you up, note that, you can still miss to achieve the requirements and still be potentially considered for the loan.
Before going on further, it is best to note that the FHA doesn't make home loans. It guarantees that the lenders will be repaid if you default the loan. This guarantee allows the banks and mortgage companies to work with the borrowers who may not be able to qualify for conventional home loans.
So how do you qualify for the loans?
First, you have to prove that you are employed. In most cases, you have to show that you have 2 years of steady employment. In addition to that, your credit score should be convincing. Something close to 620 should be enough. Nevertheless, those whose score is 580 can be still considered.
To be qualified for the loan, you cannot have a declared bankruptcy state for the last 2 years. Still, you mustn't have a foreclosure for the past 3 years. Also, if you are looking to buy a house with a loan, then the house has to be your primary residence. Lastly, you must be able to make a down payment. This is usually 3.5% of the total loan.
This means that if the house that you are purchasing is $100,000, you will need to make a down payment of about $3500. the average down payment on an FHA loan is about 4%. Comparing this with the normal conventional loan, it is less by 20%. Therefore, this makes FHA loans better and convenient.
Step 2: Get An FHA Lender
Earlier, I had mentioned that the FHA doesn't make the loans. It insures the loan. If you need a loan, then you will have to make several contacts with the lenders. This includes but not limited to mortgage brokers. After finding your contact, ask them if they are qualified to offer the FHA loan.
Keep in mind:
Some lenders can set standards that stricter than the FHA requirements. Therefore, have an open mind. If you having trouble with a lender, then it is better to find another one. In addition to that, note that not just any lender can offer the FHA-approved loans, only the federally approved.
Step 3: Have Your Down Payment Ready
This is an advantage that makes most of the people consider these loans. The FHA loans allow you to buy a home with a down payment as small as 3.5%. if you look at a normal loan, the down payment comes to about 20%-22% which is seriously very high.
While the FHA might require only a small percentage of the down payment, it is absolutely necessary, you cannot skip it.
Whilst the conventional loans will only finance 80% of your loan, the FHA loans are special since it's a guarantee of 96.5+% in financing. More than 70% of the people will agree that this is better in comparison to the normal loans. It is a requirement to pay the amount. It is no exception.
In most cases, it becomes easy to use gifts for down payment or even the closing cost. The seller can be able to pay more than 5% of the loan. This is generally towards the buyers closing costs. As a borrower, you may benefit from these activities in a buyer's market. However, they do come from time to time.
Step 4: Get A Mortgage Insurance
This is absolutely necessary. Since you are supplying less than 5% of the cost of the loan. This makes your loan at a huge risk to the lender. Therefore, the law requires you to have a mortgage insurer to protect the lender.
In case by any chance you default the loan, then the insurer will cover up the loan. As a result, this makes it very important to have a mortgage insurer. In finding the mortgage insurance, you need to check the different rates in your area. If you need better results, start with your lender (and don't forget to ask the right questions!) .
The good news:
When it comes to financing your mortgage insurance premiums, FHA loan requirements state that you can finance only the upfront portion. What you cannot be able to finance is only the annual mortgage insurance premium.
If you consider the average FICO score for the buyers who finance FHA loans, this comes roughly to about 620-680, lower than conventional loans. what if you have a lower score than 600?
The Successful Applicants
The successful applicants have proved a certain qualification. Mostly, proving to have steady employment. Or even if you are self-employed, just hand in your tax returns and financial statements.
Therefore, you can still be qualified with a lower credit score (If that's the situation – read our article about how to achieve a great credit score).
Here are the details:
The average borrower with a new FHA loan can spend 28% of their gross and pretax income on housing costs only. Everything else is just association fees.
The homeowners can also spend 43% of their income paying all their debts. These include the housing cost, car, and student loans. Comparing this to the conventional buyer, they can only spend 23% of their income on housing and 35% on recurring debts.
Considering the interest rates, they are lower compared to conventional loans. Therefore, you need to seriously consider FHA Funding. Don't forget – the interest you pay on your debt can quickly become very expensive. You can use this calculator to help determine just how expensive your debt has become.
Step 5: Have Your Documents Ready
For you to be considered for the loan, you will need to supply your lender with the necessary documents. These will prove your employment status, your savings, your credit, and personal information. All the documents required include;
- Contact information of your landlord
- Two years of W-2, 1099's, or other income statements
- The most recent month of pay stubs
- Social security card
- Two years of complete tax returns
- Most recent three months of bank, retirement, stocks, and/or mutual fund statements (all accounts and all pages)
- Individuals without credit will need recent copies of utility bills
- Bankruptcy and discharge papers (if applicable)
- Cosign information.
- Driver's license
- Credit information (most recent statements)
- Green card or work permit.
- Self-employed individuals will need three years of tax returns and a year-to-date profit/loss statement
After submitting the required documents, you are ready for the final step.
Step 6: Complete The Loan Application
After you have submitted the required documents, your lender will be able to provide you with the application documents.
Read Everything, Fill The Application Carefully
90% of the people who lie to the federal do not get a qualification for the loan. In case you do not know something, it is not wrong to look it up. Some of the people actually more than 70% that is 7 in 10 people are those who want to get a pre-approval. 30% of those who get pre-approvals get denied the loan.
Therefore, this only means that pre-approval doesn't guarantee you anything. A lender will still want to pass the inspection before giving out the loan.
Step 7: Final Arrangements To Get The FHA Loan
After getting everything ready, completing the application, handing down your papers, there is nothing more left. However, before submitting your documents, it is best that you review everything before putting a mark on the final papers.
There is something that you need to look out for: the closing costs.
In most cases, they are 2% to 3% of the purchase price. They will never exceed that. They are miscellaneous fees and expenditures that come with acquiring a home. As you value your loan, you will need to put them in consideration.