Federal Housing Administration loans account for more than 50% of all loans acquired by homeowners in the real estate market. From its conception in the 1930’s to now, this administration has grown exponentially and is now a driving force in the market. Why? Because it is often the only key available for people to buy a home, particularly if they have a spotted financial record and are trying to purchase a home anyway. While the FHA requirements for approval on a loan will vary slightly depending on the banking institution, there are basic guidelines that every potential homeowner will be required to meet before they will be considered for approval on a loan.
Where to Start: Federal Housing Administration Loans and Your Finances
When buying a home, the first step you’ll need to take is to look good and hard at your finances and clean up everything that you can that may be amiss. If your financial situation looks good, most lending institutions will happily agree to loan you the money for your new home, because you are a ‘safe’ investment. Traditional lenders are happy to work with safe homeowners. However, if you are like many of the people in today’s economy, you’ve had your fair share of financial setbacks. More than likely you’ve dealt with a bankruptcy or have poor credit, both of which are red flags for most banks when giving out a loan.
FHA requirements do not state that you have to have perfect credit or a spotless record for loan approval. You can be approved for a loan with a credit score that is less than 650, although this particular number will be determined by the bank that approves your loan. While your financial history doesn’t have to be perfect, you do have to show that you have taken the steps to repair your past financial discretions. Bankruptcy’s and foreclosures are the biggest blights you can have on your record, so it is required that you repair some of the damage from these events before you apply for a loan. Bankruptcy’s have to be at least two years old and foreclosures have to be at least three years old before you apply for your loan. Your history also has to have record of regularly monthly payments being made on additional lines of credit, which you secured to rebuild your credit score. In addition, you will have to prove that you have been with the same employer for at least two years; job hopping is frowned on because it is viewed as an increased risk for the lender. Most of them simply aren’t willing to take it on.
After you have fixed your financial footprint, at least to some degree, you can apply for approval of a housing loan. Banking institutions that have been approved to give out federally insured loans have to follow FHA requirements for the loans themselves. Hoping to ease the financial burden on the potential homeowner, these FHA requirements were designed with the homeowner in mind. They start with a reduced down payment. While traditional loans can require up to 20% of the amount of the loan, federally insured loans typically require about 3.5%. This one difference alone can mean thousands of dollars that you don’t have to come up with up front. In addition, you can have this part of the payment gifted or taken from savings; you don’t necessarily have to come up with it yourself.
When you get the loan, you will have to pay the closing costs that come with getting the house. Typically you have to front this bill out of your pocket. However, because things are run a little bit differently with a federally backed loan, there are ways around this. Closing costs can be added to the loan amount and paid off over the life of the loan, rather than coming out up front. You will end up paying more over time because of interest, but sometimes that is easier than coming up with additional thousands when the loan is acquired.
It’s important to remember that Federal Housing Administrations loans were created for you, the potential homeowner. The purpose of this administration was to open up the way for more people to become homeowners instead of renters. The real estate market relies on the buying a selling of homes, so the plan was to boost the real estate economy by making it easier for people to purchase homes. It was put into action more than 60 years ago but it’s a plan that still works today.