FHA loans or the Federal Housing Administration loan is a government backed mortgage which permits individuals to purchase a moderate-cost house with a down payment that is as low as just 3.5%. It was launched in the year 1934 with the aim to enhance the housing market. From the time of inception, the partnership between the HUD and the FHA has helped insure the mortgages of more than 30 million houses and over 47,000 mortgages for multi-family projects. Currently, FHA loans provide insurance cover for nearly 5 million single family home mortgages and over 12,990 multi-family projects. It is important to remember that maximum mortgage restrictions have been put in place by the FHA according to the place the home owners reside in.
The money for home mortgage, i.e., FHA loans, is not actually lent by the government. The government however provides insurance cover for such mortgages. Thus, if the borrower defaults on the FHA loan, then the lender gets reimbursed by FHA insurance. This permits banks and other home loan lenders to provide loans to people who generally cannot afford to buy a house and who are usually denied mortgage loans. Government insurance also helps ensure that the interest rates on FHA loans remain low despite poor credit score of applicants.
How to avail of FHA loans?
Provided below are steps that you need to take before applying for an FHA loan.
- Verify your credit score. Correct any errors that may be there in the credit report to prevent any issues when applying for the loan.
- Calculate the amount that you can afford to pay every month as mortgage. You may take into account the current rent paid by you every month, your monthly savings, and other factors while calculating the amount.
- Even though the down payment for FHA loans is really low, paying a bigger down payment can help reduce the costs of the loan in the long term. Hence, begin saving money for the down payment.
- Check out the rates of FHA loans provided by all the lenders, compare them, and sort out the ones that meet your requirements.
Listed below are qualification requirements for FHA loans:
- The minimum credit score needed to get an FHA loan is 580. This will allow for a down payment of 3.5 percent of the loan amount. People with credit scores between 500 and 579 have to put up a down payment of 10 percent.
- It is mandatory for lenders to ensure that FHA loan applicants are able to afford the home mortgage. Hence, applicants have to offer proof of income such as tax returns, W-2s, and pay stubs, etc.
- The down payment has to be from a source that is designated as being acceptable. It can include a loan, savings, or a gift. These however cannot be sourced from someone who will directly gain from an FHA loan transaction, such as the agent, seller, or the lender.
- FHA loans are meant for purchase of the main residence. It cannot be taken for buying a second house or a holiday home. It can however be used for purchase of a primary home for a member of the family.
- The Credit Alert Interactive Verification Reporting System or CAIVRS is a database maintained by the government that lists all individuals who owe back taxes, have defaulted on loans backed by the government, or have some other kind of federal debt. People who are in the CAIVRS database need to get cleared before becoming eligible for FHA loans.