According to the National Council of State Housing Agencies, more than 83 percent of first-time homebuyers used Federal Housing Administration (FHA) loans to secure their financing. These loans helped thousands of homebuyers with less than perfect credit secure a foothold in the housing market.
But the application process can be a rigorous one. So, for any first-time homebuyer searching the market, here are five noteworthy insights about your FHA loan application.
Requirements for an FHA Loan Approval
The Federal Housing Administration, an arm of the Department of Housing and Urban Development (HUD), insures all FHA loans. This insurance protects mortgage lenders. It allows them to offer low down payments, low closing costs, and ease on credit requirements.
Borrowers must show reliable income, which is done with bank statements and paystubs. The property needs to pass a home inspection, to identify any potential issues with the home, and an FHA appraisal, which checks for structural soundness and safety.
Borrowers also must use the home as their primary residence. This means homebuyers have to live in this property full-time for at least a year to qualify for an FHA loan. This prerequisite disqualifies using FHA loans for real estate investment revenue streams like rental properties.
5 FHA Insights
While the FHA loan application process may be daunting for first-time homebuyers, there are definite upsides to these loans. This is especially true for homebuyers who might not qualify for a conventional loan.
Low Down Payments
What draws many first-time homebuyers to an FHA loan is affordable down payments. The minimum down payment for an FHA loan stands at 3.5 percent if your credit score is at least 580. That said, a home buyer with a credit score between 500 and 579 must provide a down payment of 10 percent.
Reasonable Closing Costs
Borrowers are responsible for closing costs, which typically run anywhere from two to five percent of the loan amount. This expense comes in addition to the down payment. A 2020 research study revealed the average closing cost in Texas came in at $3,744.
Your Debt-to-Income Ratio (DTI) shouldn’t exceed 45 percent for an FHA Loan. This ratio is the percentage of a person’s gross monthly income that gets allotted toward paying down debts such as credit card balances.
Monthly Mortgage Insurance Premiums are required to qualify for an FHA loan. This mortgage insurance shields lenders in the event the borrower defaults on the payments. While FHA loans remain easier to qualify for than other conventional loan programs, the mortgage insurance does last the length of the loan term.
Low Credit Score
Some FHA lenders allow credit scores as low as 600. Others go lower, but the credit score affects the down payment percentage and mortgage insurance premium.
Interested in Starting an FHA Home Loan Application?
Trinity Oaks Mortgage has vast experience dealing with FHA loans in Texas. Our team can answer any questions you might have and help determine if you are eligible for this type of financing. We’ll guide you through the entire home loan process.
Check out our Loan Advisor directory and connect with a member of our team to begin the application process.
Use this form to receive the free Trinity Oaks Mortgage FHA Loan’s Guide, our guide to getting your first home loan.