Understanding FHA loans: Advantages, requirements, and how to calculate your mortgage payments
An FHA loan is a mortgage that is insured by the Federal Housing Administration. They will allow you to make down payments that are as low as 3.5% if you have a FICO score of 580. If you have a FICO score of 500, you can put down a 10% down payment and still get the mortgage. The federal government insures FHA loans, which means private lenders are more likely to offer them. Even if you put 20% down on your payment, you will still have to pay for mortgage insurance, but the duration of the insurance may vary. Before making your purchase, you will need to undergo an FHA appraisal and make sure the house meets government health and safety standards.
The advantages of an FHA loan
As you can imagine, this type of loan is good for people who have a less-than-perfect credit rating. It caters to people who wouldn’t normally qualify for a conventional loan, and it offers down payments as low as 3.5%. The Debt-to-income ratio can be as high as 50%, and sometimes even higher if there are suitable compensating factors involved.
You will have to take out mortgage insurance in most cases, and this often lasts the entire run of the mortgage, which quickly becomes a large additional cost to the proceedings. You must undergo appraisals for both regular housing and housing that hasn’t been built yet. Plus, there are loan amounts and limits that you must abide by. So, even though the loans have a lot of good factors, there are still disadvantages to having an FHA loan.
The requirements for an FHA loan
Each lender is different and is going to have different minimum requirements for borrowers who want an FHA loan. You will have to conform to a variety of different requirements depending on the type of loan you want. For example, things are a little different for people wanting a loan for a new build compared to somebody who wants a loan for a manufactured building with a set/attached foundation. Nevertheless, here are a few of the things you will probably need.
There will be a minimum credit score. Some are going to opt for a 600 or more credit rating, where others may ask for 620. There are varying interest rates and fees too. Just like payment insurance, fees are wasted money. Fees and insurance do not pay down your loan, so they are something you want to avoid or lessen to the best of your ability.
If you have a credit rating between 500 and 579, some companies may offer you an FHA loan, but they will ask for a 10% down payment. If you have a credit rating of 580, then you may pay a deposit of 3.5%.
Calculating your payments
Honestly, you will need to consult your lender for this. Many of them have calculators, but if you need a rough framework, then try the “What’sMyPayment” FHA loan tool. It is an online tool similar to those credit card calculators you see on financial planning websites. Your lender is going to tell you your payment amounts.
Use a payment tool and enter the cost of your house. Select the down payment amount, the loan term, your credit score and then your state. You need to select your state because they all have their own rules on FHA loans, and sometimes they affect your payments. You can choose to include estimated property taxes, home insurance and mortgage insurance too. Once you have entered all these details, you should get a good view of your monthly payment, along with how it is broken down into its constituent parts.
