Caroline Bianchi's Blog
FHA loans have long been a valuable resource for Americans who want to fulfill their goal of homeownership but who don’t have the benefit of a lengthy credit history and equity.
If you’re hoping to buy a home in the near future but want to explore all of your options in terms of financing, this article is for you.
Today we’re going to talk about FHA loans and how to know if you qualify for one.
What are FHA loans?
FHA loans are issued by private mortgage lenders across the country, just like regular mortgages. The difference, however, is that an FHA loan is “guaranteed” by the federal government.
Lenders decide your borrowing eligibility, and how much you can borrow, by determining risk. If you don’t have a sizable down payment (oftentimes 20% or more) and you have a low credit score, most mortgage lenders will see you as a risky person to lend to.
When you get an FHA loan, however, the federal government assumes some of that risk, allowing you to secure the loan anyway.
This means you can buy a home with a low credit score, a smaller than usual down payment, and save on some closing costs.
How do I qualify for an FHA Loan?
To find out if you qualify for an FHA loan, you’ll head to the same place as a traditional mortgage--a mortgage lender. Oftentimes, you can simply call or visit the website of lenders to get the process started.
As with all things, it’s a good idea to shop around for a mortgage lender. Their offerings will be largely similar, but there might be minor differences that make one better than another for your particular circumstances.
Down payment requirements
To secure an FHA loan, you will need to make a down payment of at least 3.5%. However, this low down payment comes with a price. You’ll typically be required to pay private mortgage insurance (PMI) fees on top of your accruing interest for your loan.
Credit score requirements
While you can often secure a mortgage with a lower credit score through an FHA loan, there are still some requirements. To secure a loan with the lowest possible down payment (3.5%), you’ll need a credit score of 580 or above.
Previous homeowners and FHA loans
A common misconception about FHA loans is that they are only for first-time homeowners. However, you can still qualify for an FHA loan if you’ve owned a home before as long as it has been three years since you’ve had a foreclosure or two years since filing for bankruptcy.
If you meet these three conditions, you should be able to secure an FHA loan through a traditional mortgage lender.
Mortgage blind spots could be dangerous, especially if you are living on a tight budget. Blind spots are generally tied to unexpected fees and emotions that cause you to overlook what would otherwise be obvious. A common mortgage blind spot has to do with the loan origination process.
Loan processing fees are just the start
Included in loan origination costs are underwriting and processing fees. These fees pay for work that lenders perform to evaluate the financial help of loan requesters. During the evaluation, lenders might also evaluate the condition and financial value of a house.
Loan origination costs aren't the only hidden mortgage fees that could increase the amount of money that you pay to own your home. Total costs of loan origination fees could top one percent of the total price on a house. That's more than $1,500 on a house priced at $150,000.
Then, there is mortgage insurance, homeowners insurance and homeowner's association fees. Other than mortgage insurance costs, these expenses may be more commonly known about. What you may not expect to pay when applying for a mortgage are:
- Mortgage application fees (Depending on the lender, you might be able to negotiate your way out of paying mortgage application fees. This is a time when it might be worth it to let your real estate agent lobby for you, working to gain you a win.)
- Title fees (Similar to how you receive a title on a car, truck, motorcycle or boat that you purchase, you should receive a title to your house after you pay the mortgage off. Title fees are not free. But, this doesn't mean that you have to pay high title fees. You or your real estate agent can shop around for good title fee prices.)
- Courier fees (These fees are associated with closing costs. Although relatively small, courier fees could be easily overlooked when buying a house.)
- Mortgage prepayment fees (To protect their financial investment, some lenders ask homeowners to pay several months of their mortgage in advance. Sign a mortgage that has mortgage prepayment fees stipulated in the writing and you could be hit with late prepayment penalties.)
- Discount points (These fees can be negotiated. Handle these negotiations the right way and you could end up paying lower closing costs.)
- Late fees (As they do with bank account fees, mortgage late fees can add up, reaching into thousands of dollars.)
- Unexpected home inspections (Depending on the lender, you could be hit with fees associated with unexpected home inspections that your mortgage lender makes.)
Financial institutions are in business to earn money, to turn a profit. Unscrupulous financial institutions aren't the only organizations that charge homeowners hidden mortgage fees. Well known and highly respected lenders also tack hidden mortgage fees onto loans.
The only time when you might become aware of hidden mortgage fees is when you are late making a payment. You also might become aware of hidden mortgage fees if you fall behind in your mortgage payments and your loan goes into default.