So you’re finally ready to explore the idea of purchasing your own home and have scoured the internet for information on how to get an FHA home loan. You already know the basics about this government-backed mortgage and yet, you still find the real estate jargon and lengthy explanations somehow confusing.
It may be ideal for you to pick up the phone and talk to a loan expert, but even then, there may be questions that you may not be comfortable discussing with someone you barely know. Usually, these questions involve money which is a topic most people avoid for fear of being judged or rejected.
When trying to determine how to get an FHA home loan, it is important to get all your doubts cleared up so here are the answers to the questions most potential home buyers like you are afraid to ask.
1. I don’t really earn that much, how do I know if I qualify?
You really don’t have to worry about a minimum or maximum amount of monthly income in order to apply. You just need to show you are earning enough in order to meet the loan obligations.
In order to pre-qualify, you must:
- Have the minimum credit score of 500 but a score of 580 is ideal to get easier approval
- Show proof of steady employment for the past two years with the same employer
- Have two active credit accounts (Example: credit card and car loan)
- Have a debt-to-income ratio not higher than 43%
- Have a clean track record of payments for the past 12 months
2. I was bankrupt before, can I still get an FHA loan?
Contrary to popular belief, you can still qualify after a waiting period. Most lenders would prefer a three-year waiting period , however, depending on the reason you filed for bankruptcy, it is possible to be granted an FHA loan for as little as 12-24 months.
During this period, it is important to show that you have re-established good credit and have not taken on new credit obligations or have been meeting all your required payments on time.
3. Can I buy any house I want?
An FHA home loan will allow you to choose most types of residential properties including detached and semi-detached homes, condo units, row houses and multiplexes.
However, the FHA will require its own appraisal to certify that the house meets minimum property standards. The property will be inspected to ensure that the structure is sound, as well as electricity, plumbing, heating and other attached systems are in good condition.
4. I’m obsessed with that fixer-upper TV show, will an FHA loan allow me to purchase one?
The popularity of fixer-uppers has increased in recent years. You may be attracted to the idea of finding a home in disrepair and renovating it to suit your needs instead of buying a brand-new property.
The good news is there is a program called HUD 203(k) that allows qualified home buyers to purchase fixer-uppers with FHA guaranteed loans. This even includes a built-in protection for the home owner should the renovation cost exceed the initial estimate.
5. How much money do I need to have upfront to pay for the house?
Your down payment cost will depend on your credit score. If your credit score is 580 or above then you can qualify for the low down payment rate of 3.5%. If it ranges from 500 – 579, then you would have to cover the 10% down payment cost.
6. My parents agreed to pay for the down payment of the house. Is that allowed?
Yes, that’s allowed. The FHA home loan program will let you obtain down payment through a gift that is given without an expectation of future repayment. This gift can come from your relative, a fiancé/fiancée, labor union, or a charity organization. The gift donor may also be required to show that the funds came from his own account.
7. Are there any other charges I should know about?
Aside from the down payment and the loan amount, you would also be required to pay other fees such as Mortgage Insurance Premiums, home inspection and appraisal costs, credit report fees, and closing costs.
There are two mortgage insurance premiums you will need to pay for. One is an upfront 1.75% of the home loan, and the second one is an annual payment billed to you monthly. In many cases, you can roll these payments into the mortgage.
Closing costs can average between 2% – 5% of the purchase price of your home. With an FHA home loan, you can negotiate with the seller to shoulder closing costs up to 6% of your purchase price.
8. Someone I met works in a lending company and is offering a good deal, why do I need him for an FHA loan?
The FHA will guarantee your loan but is not lending you the money directly. This means that you need an FHA-approved lender. Even if you personally know someone working in a lending company, not every company is qualified.
Lenders also offer different rates so in order to get the best deal, it is advisable to shop around and not go with the first lender you encounter.
9. What happens if I can’t continue to pay for the loan any longer? Can I sell the house?
If you later on decide to sell the house, your FHA home loan is assumable. This means you can potentially offer a potential buyer to continue your low-rate FHA loan instead taking on a higher interest rate.
Ask the tough questions
Buying your own home is one of the most important decisions you can make in your adult life. It’s good not to rush through the process and be ready to ask the tough, even uncomfortable questions. In the end, having all the information you need will guide you to make the right choices.