What Are FHA Loans?

An FHA Loan is a mortgage loan which is insured by the U.S. Federal Housing Administration. Often aimed at first-time buyers and low-income earners, an FHA loan can enable applicants to obtain a mortgage with a relatively small down payment.

When you take out an FHA loan, the typical down payment required is just 3.5% of the property value you want to buy. This is considerably less than the down payment than that is required for a conventional mortgage.  If you were to try and obtain a standard, non-FHA mortgage, for example, you may be expected to pay a deposit of 3.5%-20% of the property’s value. 

Your Guide To FHA Loan RequirementsBy enabling people to obtain a mortgage with a small down payment, FHA Loans are helping people to get on the property ladder and ensuring that people with limited savings can still access mortgage loans.

What Are The Credit Score Requirements?

There are a number of requirements to qualify for an FHA loan, as these types of home loans aren’t available to everyone. To be eligible for an FHA loan, you’ll need to have a credit score of at least 500. 

Your FICO credit score tells lenders how creditworthy you are, how much credit you already have and how well you’ve kept up with repayments. Generally, the higher your credit score, the better. To obtain a standard conventional, non-FHA mortgage, you would need a credit score of at least 580-620, although many commercial lenders will charge high-interest rates if your credit score is at the lower end.

In contrast, FHA loan requirements state that you can be eligible for an FHA loan with a credit score as low as 500. However, to qualify for the lowest down payment advantage, you’ll need a credit score of at least 580. 

If you have a FICO credit score of 580 or higher, FHA home loan requirements state that you could benefit from the low down payment advantage and just put down a 3.5% down payment on the property you want to purchase. 

However, if your FICO credit score is between 500-579, you won’t be able to obtain the low down payment option. While you could still be eligible to obtain an FHA home loan, you would need to put down a minimum of a 10% deposit, based on the property’s value.

FHA Loan Requirements To Secure a Mortgage

Although FHA loans can be one of the easiest ways to secure a mortgage, there are requirements you’ll need to meet. To be eligible for an FHA home loan, you’ll need to have:

  • A credit score of 500 or higher
  • Be at least 18 years of age
  • At least two years of employment history
  • Proof of regular employment, including paychecks, W2s and tax returns
  • Mortgage insurance (MIP)
  • A maximum debt-to-income ratio of 43%, with student loan payments, factored in (This can be extended to 50% in some instances)
  • An appraisal carried out by an FHA-approved appraiser

You also need to occupy the property as your primary residence, although non-occupying co-borrowers may be permitted. If you have declared bankruptcy in the past, at least two years must have passed before between this and applying for an FHA loan. Similarly, if you have owned a property which has been foreclosed on, you’ll need to wait for at least three years before being eligible to obtain an FHA home loan.

FHA Loan Requirements For First-Time Buyers

FHA loans are popular with first-time buyers because they enable you to buy a property with a low down payment. First-time home buyers may have a poor credit rating, which makes an FHA loan the perfect choice. While credit scores between 500-579 will require a 10% property deposit with an FHA loan, many people would find it virtually impossible to obtain a mortgage from any mortgage lender with a credit score in this range.

Unlike with a conventional mortgage loan, you can use a monetary gift as your down payment when applying for an FHA loan. If family members or friends want to help you move up on the property ladder they are legally able to provide the funds for an FHA loan down payment. While some commercial lenders won’t allow this, an FHA loan doesn’t prevent you from using a financial gift to pay part or all of your down payment.

FHA Loan Requirements For Low-Income Buyers

While many first-time homebuyers benefit from acquiring an FHA loan, you don’t have to be a first-time buyer to qualify. For example, if you want to sell your existing home and move to a larger property an FHA loan could be the ideal solution.

If you have a limited amount of savings, an FHA loan can help you to move up on the property ladder because you won’t have to put down a large deposit. If you are a borrower with a low income, it can take years to save a substantial deposit, which can delay your ability to buy your own home for quite some time.

Even if you have a low income, you can still qualify for an FHA home loan. Provided you have steady employment and meet the other requirements (as stated above), there’s no reason a low income should prevent you from securing an FHA loan. 

Down Payment Requirements For FHA Loans

If you have a credit score of 580 or higher, you can obtain an FHA loan with a down payment of 3.5%. If your credit score is 500-579, you will need a down payment of 10% to obtain an FHA loan.

However, these requirements are still far less than most commercial mortgage lenders and ensure you can buy a property even if you have a poor credit rating or limited savings for a down payment.

What Are FHA Closing Costs?

All mortgages have closing costs, and FHA loans are not excluded. However, you may find that your FHA closing costs are less than those enforced by most commercial lenders.

Typically, FHA loan closing costs to amount to approximately 2%-5% of the purchase price of the property. These fees cover the cost of home appraisals, origination fees, titles and other mandatory costs. While 2%-5% may sound like a relatively small amount, this depends on the value of the property you’re buying, so it’s important to factor them in when planning your budget. 

Keep in mind that closing costs vary from one FHA-approved lender to another, so be sure to shop around and compare lenders before making your decision.

What Are FHA Approved Lenders?

Not all banks, mortgage bankers, mortgage brokers and financial institutions can offer FHA loans. Instead, there are FHA-approved lenders who are able to process FHA loan applications and issue the loan. To become an FHA-approved lender, the organization must be approved by the U.S. Federal Housing Administration. 

The Department of Housing and Urban Development makes it easy to find an FHA-approved mortgage lender in Chicago. Simply enter your location into their website, and they’ll provide a list of organizations which offer FHA loans. 

However, fees, such as closing costs, are variable, so one lender may charge more than another. To make sure you’re getting the best deal, take the time to compare lenders. 

FHA Loans At A and N Mortgage

As an FHA-approved lender, A and N is proud to offer FHA loans to first-time buyers, with a low income and poor credit history. We’re committed to helping you buy a property, regardless of your situation. 

Provided you meet the standard criteria and can show that you’re eligible for an FHA loan, A and N Mortgage can help you to take your first steps up the homebuying ladder. With a dedicated team of Mortgage Consultants and Loan Officers, we can help you find the right home loan and even secure your pre-approval so you can start house hunting straight away. 

Conclusion

Buying a property has always been trick, but FHA loans have made the dream a reality for millions of people. Almost half of first-time homebuyers rely on an FHA loan to purchase their first property, which shows just how popular and effective the scheme really is.

By providing additional security to lenders, the government is helping people invest in their own homes, even if they have a limited down payment or poor credit history. If previous financial problems have prevented you from buying your home or if you’ve been unable to save a large deposit, an FHA home loan could give you the opportunity to buy your very own property.

Of course, purchasing a property and obtaining an FHA home loan can seem daunting at first. If you’re unsure how to apply for an FHA loan or you simply want to find out more about how the process works, why not get in touch with us today? 

Our friendly team is always on hand to provide advice and assistance and we can help you to start your application. To find out more about FHA loans in the greater Chicago area, contact A and N Mortgage now at 773-305-LOAN.

 

A and N Mortgage Services Inc, provides you with high-quality home loan programs tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool.

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