It is every American's dream to buy their own homes and the Federal Housing Administration or FHA has created several programs that will help realize that dream. These programs allow borrowers to purchase their dream house with a smaller down payment, making it easier for borrowers to qualify for mortgage. FHA doesn't actually lend people money; its role is to reimburse FHA lenders when the borrowers default on their home loans. This helps reduce the risk of loss on the part of the lenders.
Here are common FAQs about the FHA Loan.
What is an FHA Loan?
An FHA loan is a mortgage loan. By getting this type of loan, the lender doesn't have to write off a loan in case the borrower defaults payment because FHA will be the one to pay.
What are its advantages?
An FHA loan is one of the easiest loans to qualify for as it requires low down payment. One can be approved even with a tarnished credit record.
The down payment requirement is usually pegged at 3.5%. Borrowers who do not qualify for private loans or those who cannot afford the 20% down payment traditionally imposed by lenders can easily apply for USDA Loans as well.
There is no repayment penalty requirement. FHA can afford to be lenient to their clients in times of financial crises.
What are its downsides?
One important concern about an FHA loan, since it is not as strict as regular loans, is it needs two kinds of mortgage insurance premiums. One that has to be paid upfront and in full and another that can be paid monthly. The mortgaged property should meet certain conditions set by FHA and a certified appraiser from FHA should conduct the appraisal.
How do you know if you can qualify for an FHA loan?
Since it is easy to get approved, almost anybody can apply for an FHA loan. FHA doesn't impose income limits, but there is a maximum cap as to how much you can borrow. In most cases, the approvable amount given is relative to the prices of the properties in your area. You need to have reasonable debt to income ratio, and in general, you have to rate better than 29/41. You don't need to have a perfect credit rating, a decent rating would suffice.
How does it work?
FHA assures lenders that they will pay them if a borrower defaults on their FHA loan. To make this possible, FHA will charge their borrowers with a reasonable amount to serve as fee. Borrowers will have to pay 1% mortgage insurance premium (MIP) fee upfront. Aside from that, a monthly payment will also be required. If the borrower defaults on the loan, FHA will use the collected insurance premiums to pay off the remaining mortgage.
What happens if you fall behind on your monthly payment?
In case the inevitable happens and you fall behind on your payment, then your mortgage is guaranteed not to be foreclosed 90 days after the payment date. FHA recognizes these circumstances as valid reasons: loss of income from natural disasters or injury-related. There are guidelines for this 90-day delay; you just need to contact your FHA loan officer immediately so you can discuss details.