Loan: Principles and Requirements
Loan: Basic Principles and Requirements”
An FHA loan is a mortgage provided by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are intended for low to medium income borrowers who cannot make a large down payment.
Starting in 2017, these loans can lend the borrower up to 96.5% of the value of the house; The 3.5% down payment requirement can come from a gift or a grant, making FHA loans popular with first-time home buyers.
FHA loans were introduced after the Great Depression in the 1930s. During this time, defaults and foreclosures shot up. In response, the government has created federally insured loans that reassured mortgage lenders, reduced lender risk, and stimulated the housing market. By insuring mortgages, lenders were and are more inclined to issue large mortgages in cases where they would not normally have approved the loan application.
Who are loans for?
FHA loans are offered to people on a low income who have a credit score of only 500. Persons with a credit score between 500-579 can obtain an FHA loan with a down payment of 10%; Individuals with a credit score higher than 580 can get an FHA loan with as little as 3.5% down. The Federal Housing Administration does not lend the borrower the money to take out a mortgage or buy the house. On the contrary, the borrower pays a monthly or annual mortgage insurance premium to the FHA to insure the loan that the lending institution provides him or her. In the event of default, the financial risk of the lender is minimized, since the FHA would intervene to cover the payments.
Having no credit history is no problem with an FHA loan. Instead of your credit report, the lender can view other payment history records, such as utilities and rental payments.
Even people who have gone through bankruptcy and foreclosure may still be eligible for an FHA loan. The lower the credit score and the lower the down payment, the higher the interest rate.
In addition to the traditional first mortgages, the FHA offers a reverse mortgage program known as Home Equity Conversion Mortgage (HECM). This program helps seniors to convert the shares in their homes into cash while keeping the titles at home. FHA also offers a special product known as an FHA 203 (k) loan, which affects the costs of certain repairs and renovations to the loan. With this one loan a person can borrow money for both a home purchase and a home improvement. That can make a big difference to a borrower who doesn’t have a lot of money to hand after making the down payment. The FHA Energy Efficient Mortgage program is a similar concept, but aimed at upgrades that lower the energy bill. For example, the cost of newer, more efficient devices becomes part of the loan.
How loans work
To approve an FHA loan, the borrower must have a mortgage insurance policy. For an FHA loan, two types of mortgage insurance premiums (MIP) are required by the borrower: an Upfront Mortgage Insurance Premium (UFMIP) and an annual MIP. The initial MIP is equal to 1.75% of the loan amount (from 2017) and is paid at the time of closing. A borrower who has received a mortgage for $ 350,000 must pay a UFMIP of 1. 75% x $ 350,000 = $ 6, 125. Payments are deposited into an escrow account set up by the US Treasury Department and the funds are used to make mortgage payments in case the borrower defaults.
The annual MIP payments are made by the borrower every month. The payments vary depending on the amount borrowed, the length of the loan and the original loan-to-value ratio (LTV). The typical MIP costs are usually 0.85% of the loan amount. Following our example above, the borrower should make annual MIP payments of 0. 85% x $ 350,000 = $ 2, 975 or $ 247. 92 monthly. This must be paid in addition to the costs of UFMIP.
When you buy a house, you may be responsible for certain cash expenses, such as costs for making a loan, lawyers’ fees, and costs for the assessment. One of the benefits of an FHA mortgage is that the seller, home builder or lender may pay some of these closing costs on your behalf. If the seller has difficulty finding a buyer, he or she can simply offer you to help you with closing time as a deal sweetener.
Additional loan requirements
Although FHA loans offer mortgage options to low-income or low-credit people and home buyers for the first time, there are specific credit requirements set out by the Federal Housing Authority.
First, a borrower must have a fixed history of the employment history or have worked for the same employer in the past two years. This is important because the FHA requires that the front-end ratio of a borrower – which is the sum of the monthly mortgage payment, HOA costs, property taxes, mortgage insurance and homeowner insurance – is less than 31% of the total gross income . However, it is possible to be approved with a ratio of 40%. In addition, the borrower’s back-end ratio – which is the sum of the monthly mortgage payment and all other monthly consumer debts – must be less than 43% of the total gross income. However, it is possible to be approved with a ratio as high as 50%.
Those who work as self-employed people need two years of successful history of self-employment, documented by tax returns and an up-to-date balance sheet and profit and loss account for the first nine months. Applicants who have been self-employed for less than two years but more than one year may be eligible if they have a solid history of work and income for the two years prior to self-employment and self-employment in the same or related occupation to be .
In addition, borrowers must go bankrupt for at least two years, unless a borrower who has recently gone bankrupt has demonstrated that it is an uncontrollable circumstance. Borrowers must also be at least three years away from forced sales and prove that they are working on restoring good credit. However, a borrower who is delinquent about his / her federal student loans or income taxes is not eligible for an FHA loan.
To be approved for an FHA loan, a borrower must be of legal age in the state where he applies for a mortgage, have a valid social security number, and be a US legal resident.
In general, a property financed by an FHA loan must be the principal residence of the borrower and be occupied by the owner. This loan program cannot be used for investments or rental properties. Detached and semi-detached houses, townhouses, terraced houses and apartments in FHA approved condo projects are all eligible for FHA financing.
Finally, the lending institution using the borrower must be approved by the FHA Board, since the FHA is not a lender but an insurer. In other words, the money for an FHA mortgage is not given to borrowers by the FHA; instead, borrowers receive the money from a lender approved by the FHA, and the FHA guarantees the loan. On the one hand, this means that different credit institutions can offer the borrower a very similar mortgage (or can abandon the borrower), because the FHA loan guidelines do not change on the basis of who can borrow money. On the other hand, the FHA offers the lenders flexibility in determining their own standards for determining the eligibility of loans, and the minimum requirements of many lenders are higher than those of the FHA. As a result, one institution can approve an FHA loan while another rejects it.
Are loans for you?
Although an FHA loan may sound fantastic, it is not for everyone. People with a credit score of less than 500 are usually not eligible for an FHA loan.
A borrower who can pay a large down payment may be better off with a conventional mortgage, as it can save more money in the long term through the lower interest and mortgage insurance premiums that conventional lenders offer.
Talk to an FHA adviser to determine if this type of mortgage is right for you.
“Loan: Basic Principles and Requirements”