Federal Housing Administration (FHA)
Last updated: June 10, 2020
Author: Sohrab Karim / Edited by: Persia Mumtaz
Author: Sohrab Karim / Edited by: Persia Mumtaz
What are FHA Loans?
If you've been shopping around for a home I am sure you've heard the term FHA thrown around casually. To one who is unfamiliar, this may sound confusing, but it's actually a simple term and commonly used in the real estate industry.
So... what is FHA you ask?
FHA stands for Federal Housing Administration and their main purpose is to help communities grow and increase land ownership. But first, we must understand that this type of loan is not for everyone, it is designed to help people in the lower-income bracket to give them the opportunity to participate in land ownership. The way this works is the Administration insures the mortgage so lenders take on less risk when lending. This whole loan process is known as a "FHA Loan", meaning that the loan is backed by the government and provided by the lender to the borrower. Simple!
So... what is FHA you ask?
FHA stands for Federal Housing Administration and their main purpose is to help communities grow and increase land ownership. But first, we must understand that this type of loan is not for everyone, it is designed to help people in the lower-income bracket to give them the opportunity to participate in land ownership. The way this works is the Administration insures the mortgage so lenders take on less risk when lending. This whole loan process is known as a "FHA Loan", meaning that the loan is backed by the government and provided by the lender to the borrower. Simple!
FHA Requirements
Like all loans there are certain things that one must qualify for before getting the it. According to bankrate.com, the qualifications for a FHA Loan as of 2020 is as follows:
- 10% of the purchase price as downpayment with a FICO score of 500 - 579 OR 3.5% of the purchase price as downpayment with a FICO score of 580 or above.
- Two years of provable employment history
- Verifiable income either through pay stubs, tax returns, and/or bank statements
- You must occupy the property (cannot be investment property)
- Property must be HUD compliant and be appraised by an FHA-approved appraiser
- Your monthly mortgage payments [which include a required insurance premium (PMI)] should not exceed 31% of your gross monthly income. (Lenders may allow a ratio of up to 40% in some cases.)
- Your total monthly expenses (mortgage, plus all other monthly debt payments) should not exceed 43% of your gross monthly income. (Lenders may allow a ratio up to 50% in some cases.)
- If you experienced a bankruptcy, you must wait one to two years to apply, and three years for a foreclosure. [Lenders may make exceptions on waiting periods for borrowers with extenuating circumstances (bankrate.com).]
FHA Limitations: Why a FHA loan v.s. a Conventional Loan?
Now lets get into the Pro/Cons of this type of loan over conventional loans. This FHA loan is great because
The drawback to these types of loans is:
- Your downpayment is generously lower than conventional loans
- The loan is backed by the United States Government
- You do not need a strong FICO score
The drawback to these types of loans is:
- Limits you to only residential properties
- Property must be your primary residence
- The terms are non-negotiable
- Must pay upfront and monthly insurance premium
Conclusion
FHA Loans are great loans and give a huge opportunity for people to increase home ownership in United States. In most cases, people who are qualified for these types of loans usually will pick FHA over conventional loans. There are many benefits to this type of loan over others with some minor drawbacks - but great nonetheless. It is important to consult with an attorney or Sofyan Karim (your agent for life!) if you have any questions or want to check if you qualify for an FHA loan.
