What is a FHA Mortgage?

Written by on January 11, 2012 in Government Mortgage Loans - No comments
How the Federal Housing Administration (FHA) Helps You Get a Mortgage

Qualifying for a conventional mortgage loan can prove challenging due to tight lender guidelines. Getting a loan with a conventional lender typically requires a high credit score (above 680). In addition, if you were to refinance your mortgage with a conventional lender, you’ll need at the very least 20 percent equity unless you are willing to pay PMI insurance.

Qualifying for an FHA Mortgage – Income, Credit, and Equity

An FHA mortgage insured by the Federal Housing Administration opens the door to refinancing and homeownership. The requirements for an FHA home loan are often misunderstood to be challenging, but with a knowledgeable loan officer it can be rather simple. Lenders that offer these types of loans will assess your income, collateral (your home) and credit. You’re required to submit your most recent income documents, which include complete tax returns and pay stubs. Other acceptable documents to verify income include bank statements and verification of employment checks. Be prepared to provide at least two years worth of income statements.

FHA Credit Score Requirements – As Low as 620 Credit Score

A good credit history is vital to any home loan application. You demonstrate good credit by paying your bills on time each month and keeping your debts low. In conjunction with these factors, your credit score also determines your eligibility for a mortgage loan. With an FHA mortgage, you will need a minimum credit score of 620. This lower requirement is beneficial if you’re trying to buy a property after foreclosure or bankruptcy. Both incidents drop your credit score and rebuilding your score after either mishap takes time.

Although filing bankruptcy or losing a prior property does not result in a home mortgage loan rejection, there is a wait period for loans after both incidents. You must wait 36 months after a foreclosure and 24 months after a bankruptcy.

FHA Income Requirements – Up to 55% of Gross Monthly Income

Affordability also determines FHA loan approval. Applying for a loan and submitting your income and employment information does not guarantee home loan approval. Underwriters review each application and determine whether an applicant can meet the monthly requirement for the home loan. As a rule, the mortgage payment on loans insured by the Federal Housing Administration cannot exceed 45-55 percent of the borrower’s gross monthly income depending on how strong your credit score and equity situation is.

FHA Down Payment & Equity Requirements – As Low as 3.5% Down

Mortgage lenders must also factor in your down payment when approving your mortgage loan application. The majority of mortgages require a down payment. Averages range between 5 and 20 percent of the purchase price but can be as low as 3.5 percent. The Federal Housing Administration helps borrowers purchase properties by reducing the requirements for a mortgage loan. An FHA loan only requires a 3.5 percent down payment; and with regards to closing or settlement costs, FHA permits closing assistance from sellers. There’s even the option of including these fees into the mortgage loan.

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