The Federal Housing Administration (FHA) was created as part of the National Housing Act of 1934. It insured loans made by banks and other private lenders for home building and home buying. The goals of the FHA were to improve housing standards and conditions, provide an adequate home financing system through insurance of mortgage loans, stabilize the mortgage market, and make home buying within reach for the masses.
While the FHA does not lend money directly, it does insure loans made by private lenders. The first step in obtaining an FHA loan is to ask lenders or mortgage brokers if they originate FHA loans. As each lender sets its own rates and terms, comparison shopping is important in this market. The potential lender then assesses the prospective home buyer for risk. The analysis of one’s debt to income ratio enables the buyer to know what type of home can be afforded based on monthly income and expenses and is one risk metric considered by the lender. Other factors such as payment history on other debts, are considered and used to make decisions regarding eligibility and terms for a loan.
The FHA allows first-time home buyers to put down as little as 3.5% and receive up to 6% towards closing costs. If little or no credit exists for the applicants, the FHA will allow a non-occupying co-borrower who is a blood relative, such as a parent, to co-sign for the loan.
What’s in it for me?Anyone from a college grad to an executive for a Fortune 500 company can get an FHA loan as long as the requirements are met.
Compared to conventional loans, FHA loans have many advantages:
- A 3.5% down payment is required in most cases. In some special situations, only 0.5% is needed.
- Applicants with credit scores as low as 620 can qualify. In certain cases, people with credit scores as low as 580 can still be approved.
- A non-occupying co-borrower who is a blood relative can co-sign to help the applicant qualify.
- Seller can pay up to 6% in closing costs.
- No reserves needed after closing.
- Down payment and closing costs can be 100% gifted.
- Higher debt-to-income ratios are allowed.
- Applicants can qualify for an FHA loan two years after a bankruptcy or short sale and 3 years after a foreclosure.
For those already carrying an FHA loan already, it can be refinanced as a “Streamline,” which does not require an appraisal as long as the borrow has been current with mortgage payment in the past 12 months. For more information on FHA loans and other programs, please call First Capital at (310) 458-0010