The FHA loan program is the one which is sponsored by the Federal Housing Administration to assist homeowners to make homeownership affordable. Compared to conventional loans, FHA loans do not have strict down payment requirements and minimum credit scores. But one has to fulfill some conditions in order to obtain this kind of approval. This article outlines the most important procedures required to secure an FHA mortgage.
Check Your Credit Score
One of the significant predictors that a lender considers when approving an FHA loan is your credit score. With an FHA loan, the minimum credit score accepted is 500. However, the higher the scores are, the higher the rates and terms of mortgages one has a chance to receive. To increase your chances of approval and a reasonable rate, try to have a credit score of 580 and above. It is advisable to reduce account balances, challenge erroneous entries and establish a record of timely payments to increase your scores.
Verify Your Debt-to-Income Ratio
This way, the lenders want to ensure that your income is able to pay for your monthly mortgage payments and other debts. Your front-end DTI reduces housing expenses with income. Finally, back-end DTI measures total debts against earnings. The FHA guidelines do not allow your back-end DTI to go above 43% in order to qualify. The lower your ratios, the more creditors get convinced that you will meet your mortgage obligations properly. If the DTI ratio is high, then one can consider either reducing the balances or get a cosigner for the account.
Save for a Down Payment
Paying for a down payment was once one of the major challenges faced by FHA borrowers when obtaining a loan. However, FHA loans are now available at only 3. 5 percent down. On a $300,000 home, that is only $10,500. That is far from the 20 percent or $60,000 required for conventional loans normally. The ways of saving for an FHA down payment include cutting other expenses, having a side job, getting money as gifts from relatives or friends, or using down payment grants. This means that the more down payment you make, the better the offer for the remaining amount you will get.
The candidates should have a 2-year job history.
Providing proof of steady income shows the lenders that you will be able to pay the mortgage as you continue with your employment. According to FHA rules and regulations, it is mandatory for any candidate to have at least two years of steady employment history in the same occupation. If one has served for less than two years, he or she may need an eligible cosigner. If the loan applicant has switched employers recently, being placed in a similar industry will suffice in meeting FHA employment requirements. Intermissions between jobs demand letters pointing out the causes.
Shop for Mortgage Rates
Interest rates fluctuate with the different financial markets and the policies of the lending company. Comparing mortgage rates from different lenders means getting the lowest possible rate of interest. The prequalification with several lenders gives you the opportunity to know the loan amount and the terms that you are eligible for. Collect all the letters you have written to prequalify the loan. Then choose the lender that has the lowest interest rate and other charges all together. Getting an agreed rate immediately after shortlisting the best lender helps you in case the rates go up in the future.
Review Loan Options
Besides guarding competitive rates, comparing loans enables you to determine the most suitable financial products. Factors that may be considered include the loan duration, the cost of initiating the loan, costs of closing, insurance, and other related factors. They can tell you how some elements of your mortgage – like your down payment or loan type – impact other aspects. Choosing a 30-year term instead of 15 years results in lower payments but higher interest during the term of the loan. It does require a bit of work up front to find the right loan structure.
Get Prequalified
You will have better chances of getting a prequalification or preapproval for an FHA before beginning to make offers. Prequalification ensures that you can probably meet the requirements based on informal paperwork. Underwriting and credit checks are major activities that are carried out by preapproval to certify the qualification. Sellers prefer buyers with preapprovals because they reduce the chances of the funding not going through. In the preapproval period, you will be required to produce W-2s, paystubs, bank statements, balances on existing debts, and others. Your lender carefully reviews the documentation before providing a preapproval letter with the loan amount.
Inspect the Property
FHA needs you to order an appraisal from an FHA roster appraiser. Appraisals ensure that the price at which property was negotiated reflects the fair market value of the property. Residential property inspections reveal material imperfections that might be expensive in the future. Foundation, roof, electrical, plumbing, HVAC, appliances, structure, and others are all examined by the home inspector. This means that major issues have to conform to FHA health and safety requirements before the closing. Attend inspections so that the inspectors themselves can show you what they have issues with. Then you can require sellers to agree to make any repairs that are needed before closing.
Secure Home Insurance
Homeowners insurance is a policy that helps to cover losses or damages of a home and its contents due to perils such as fires, storms, floods, theft among others. Similar to how lenders want to make sure you can make mortgage payments, they need assurance your home is well insured. FHA loans require you to have sufficient homeowners insurance at the time of closing. The absence of an insurance policy causes the process to slow down. It is advisable to compare various firms’ charges in order to arrive at a middle ground of premium costs and degree of coverage offered.
You should now have a clear understanding of some of the prior steps that assist homebuyers to meet the requirement to access FHA loans. Following credit score, DTI, employment, down payment and other eligibility criteria helps to open the door to approval. Mortgage rate and loan comparison makes financing possible. Home inspections and appraisals guarantee that you are buying a good home. And prequalifying or getting preapproved plus insurance enhances the closing. Use these steps when looking for an FHA mortgage. With a little effort and planning, people can make homeownership a possibility this year.
