Owning a home is one of the most rewarding things in life. If you own a home, you automatically have the luxury of privacy and having personal space. However, not everyone has adequate funds to secure housing. For this reason, housing loans exist.
A loan is given to you by a bank to help you purchase a home. Because it’s given to you by a bank, you’re given a set amount of time for you to be able to pay it back. Typically, it takes about 20 years. There are many types of loans, and one good example are FHA loans.
What’s there to know about FHA loans? In this article, we’ll tell you everything you need to know. Read on below to learn more.
Understanding FHA Loans
An FHA loan is a government-based mortgage from the Federal Housing Administration. FHA loans are a go-to option for many people because the application requires a lower credit score and down payment than most commercial loans.
It’s also important to note that while FHA loans are from the government, they’re offered by mortgage lenders certified by the FHA.
How It Works
Like any other housing loan, the payment terms for FHA loans also have a specific time. Typically, payment terms for FHA loans go up to 15 and 30-year periods.
As stated earlier, you don’t need a very high credit score to qualify for an FHA loan. However, there’s a catch: borrowers have to pay FHA mortgage insurance. This protects the lender from losses if ever the borrower defaults on the loan. Most loans require mortgage insurance, but it’s a little different on how they work with FHA loans because it requires the borrower to pay two premiums: upfront and annual.
An upfront mortgage insurance premium is 1.75% of the loan amount paid when the borrower gets the loan. This can be rolled into the total financed amount of the loan. On the other hand, the annual mortgage insurance premium is 0.45% to 1.05%, depending on the loan term chosen (15 years or 30 years), the loan amount, and the initial loan-to-value ratio (LTV). This premium’s amount is divided by 12 and is paid monthly.
If you borrow $150,000, for instance, expect your upfront mortgage insurance premium to be $2,625. On the other hand, your annual premium could be somewhere from $675 or $56.25 per month to $1,575 or $131.25 per month, depending on your chosen loan term.
FHA mortgage insurance premiums are canceled after 11 years for most borrowers if they only make a 10% down payment and stick with their monthly mortgage payments. Conversely, loans with an LTV ratio greater than 90% will carry insurance until they’re fully repaid.
Finding the Best FHA Lender
The simplest way to find an FHA lender is to see if they have FHA certification. However, the process will be complicated because different lenders have different rates, costs, and underwriting standards. You can apply for an FHA loan through banks and independent mortgage lenders.
Applying for an FHA Loan
Before applying for an FHA loan, it’s essential to take note of the following first:
- Know your budget. You should know how much you can afford to pay before applying for the loan. To better understand your budget, take into account your current income, expenses, and extra savings. Additionally, you can also use a mortgage calculator for more accurate estimates.
- Compile your documents. Applying for a loan means paperwork upon paperwork, which includes a look at your finances. Before applying for an FHA loan, you must have: two years’ worth of tax returns, two recent pay stubs, your driver’s license, and complete statements of your assets such as checking and savings account or 401 (k) plan.
- Compare costs. As stated earlier, FHA lenders typically differ in prices, which is why it’s recommended that you compare pricing if you happen to be approved with multiple lenders. This way, you get the most out of your deal—and one you can sustain for the years to come.
Loans can be pretty hard to apply for, but the good news is that FHA loans exist. As opposed to most types of loans, the guidelines in qualifying for an FHA loan are pretty relaxed, which is why it’s a good option if you want to own a house.
NetLending offers FHA home loans if you require faster financing for your home in California and Hawaii. Every homebuyer deserves to have a step closer to their dream home, which is why we’re here to help speed things up. Contact us today to learn more!