Many of us have dreams of owning our own homes, not solely for the purpose of having a roof over our heads but also for investment. It’s no secret, however, that homes are expensive and cannot be easily bought. It requires shelling a ton of money—money you may not have now.
This is where a Federal Housing Administration (FHA) loan comes into play. Ideal for first-time home buyers, it offers a low barrier to buying a home.
What is a Federal Housing Administration (FHA) loan?
An FHA loan is a mortgage that’s insured by the government. It can be used to buy a home, refinance an existing home loan, or rehabilitate a home that is in dire need of repairs. Even though FHA loans are issued by private lenders like banks and credit unions, the government protects them against losses in the chance that you default on the loan. As a result, borrowers who have less than ideal credit scores or those who aren’t capable of putting down a hefty down payment can have higher chances of qualifying. Down payments can be low as 3.5 percent, and debt-to-income ratios as high as 50 percent are usually allowed.
The amount you borrow is capped, however, and the limit hinges on the conforming limit for the area you choose. You must also adhere to strict health and safety standards to qualify. Plus, if you’re only opting for an FHA loan for the low-down payment, it should be noted that you also have to purchase mortgage insurance, which can make FHA loans more expensive than other types of mortgages.
Even though it’s typically first-time homebuyers who opt for FHA loans, repeat buyers or homeowners looking to refinance their mortgage can also qualify, so long as you’re purchasing a house or a multifamily residence where you’ll be spending most of the time.
How do I qualify for an FHA loan?
In order to qualify for an FHA loan, you should satisfy a number of requirements. Listed below are the minimum requirements, but it should be noted that some mortgage companies may have additional stipulations.
- Credit Score: Your credit score must be at least 500. If your score is between 500 and 579, you can still be eligible for a loan, but you will have to put down a larger down payment.
- Down Payment Funds: If your credit score is 580 or higher, your FHA down payment can be as low as 3.5 percent. For credit scores between 500 and 579, you’ll have to pay 10 percent of the purchase price.
- Debt-To-Income Ratio (DTI): The FHA requires that you have a DTI of less than 50. This means that your monthly debt payments can’t be more than 50 percent of your pretax income.
- Property Approval: Whether you’re buying a house, condo, manufactured home, or multifamily home, the property has to meet FHA minimum property requirements. The agency needs an appraisal apart from a home inspection to make sure that it’s a good investment and meets basic safety and livability standards.
- Mortgage Insurance: FHA mortgage insurance is already part of every loan. When you avail of an FHA mortgage, you will be required to make upfront mortgage insurance payments and make monthly payments after.
To make sure that you’re getting the best FHA mortgage rates and loan terms, it’s worth shopping with more than one FHA-approved lender so that you can compare offers. If you need help with qualifying for an FHA loan in Los Angeles, get in touch with us today.