FHA loans are growing in popularity because of the many benefits they offer to first-time home buyers. So with so many people interested in them, here is a list of things that FHA loans require.
Minimum Down Payment of 3.5%
If you go with a conventional loan it is recommended that you make a 20% down payment. This would cost $50,000 on a $250,000 house. However, an FHA loan only requires a 3.5% downpayment, which is on;y $8,750 on that same house.
Typically, this is the loan of choice for millennials, who make up a big chunk of today’s first-time home buyers. This is because a good portion of millennials have less than $1,000 saved up for a down payment. So, FHA loans get these first-time home buyers into houses quicker.
Minumum Credit Score of 500
Like a typical loan, you have to meet the minimum credit score requirements. On an FHA loan the minimum is a credit score of 500 which is a lot lower than conventional loans. However, if your score is below 580 you will have to make a larger down payment of 10% versus 3.5%. These credit requirements may also fluctuate between lenders and the state of the current housing market.
Mortgage Insurance
Since the federal government backs FHA loan, all buyers will have to pay an upfront mortgage insurance premium. The fee is currently set at 1.75% which is an extra $4,375 on that $250,000 house.
Borrowers will also have to pay an annual mortgage insurance, which is currently sitting around 0.85% of the borrowed amount. That means an extra $2,125 more a year. For most loans, this mortgage insurance remains throughout the life of the loan, or until you refinance out of an FHA loan.
Max Debt-To-Income Ratio of 59%
The debt-to-income ratio is something that lenders use on all types of loans to determine if the buyer can afford the down payments. They compare the amount of money you make to what you owe. The max debt-to-income ratio is currently at 31%. That being said if you make $6,000 a month (pre-tax) your housing expenses should not exceed a third of your income of $1,860. For FHA loans, however, lenders typically look for the total debt load to not exceed 59% of your pre-tax income.
Rigorous Appraisal
Pretty much all loans will require a home appraisal, which just ensures lenders the home is being bought at a fair market price. However, FHA appraisal guidelines are more rigid than a conventional loan and not all house will get the green light. This may mean that the seller of the house you want to buy may have to make some repairs before it will get approved.
