by Susan Paige
If you’re in the process of buying ahouse, you’ve likely heard of an FHA loan. These loans are another type of mortgage that helpsmake housing more affordable for those who cannot afford a conventional loan.
When you’re shopping for a mortgage, it’s essential that you look at all the options available to you. An FHA loan may be one of those options.
To help you get a better understanding of what an FHA loan is, we outlined a bit of the basicsof how this mortgage could benefit you.
What is an FHA Loan?
The United States Federal Housing Administration (FHA) backs an FHA loan provided by a reputable lender. If you cannot repay your loan, the FHA will step in and pay the lender.
This loan came to be in 1934, during the Great Depression. It was when the housing market was struggling, andfamilies couldn’t afford to buy a home. Implementing this mortgage was to help make housing more affordable, and boost the numberof families who owned their ownproperty.
What Are the Benefits of an FHA Loan?
One of the main appeals of an FHA loan is that it makes it a lot easier to buy a house. With the backing by the FHA, lenders are willing to take more of a risk on a mortgage, allowing you to take out more than you could through a conventional loan.
The down payment on an FHA loan is smaller than what other loans require. You can put down as little as 3.5percent. That isn’t to say you have to put down only that amount. If you can afford a higher down payment, you’re better off doing so.
If you’ve gone through bankruptcy or foreclosure, you have an easier chance of getting approved with an FHA loan. With conventional loans, you’re seenas a higher risk which makes it more difficult to get approval.
FHA loans also allow you to pay for renovations. If your potential property requiresrepairs and upgrades, this type of mortgage willallow you to fund the renovation process with only one loan.
As with many other mortgages, an FHA loan can be usedas a refinance option. If you want to consolidate your debt, get more money for investments, or other reasons, you could use the FHA cash-out refinance, which is like taking out a second mortgage.
Qualifications for an FHA Loan
There is no minimum income requirement for an FHA loan.You simplyneed to prove that you have the funds to keep paying back the loanevery month. There is no limit either, although the FHA loan is gearedtowards low-income families.
Your debt-to-income ratio should still be low. Typically, lower than 31/43 is best. However, you could evenget approved with a debt/income ratio closer to 50 percent. Basically,the lender wants to know that you’re bringing in more money than you’re spending on debt.
Having a decent credit score still matters for an FHA loan. However, it can be quite lower than what you need for a conventional loan. The more you put down for a down payment, the lower your credit score could go and still get approved.