FHA Loans in a Nutshell

When talking to anyone about the real estate market there are a few terms you always hear. Interest rates, market trends, credit score, and FHA (Federal Housing Administration) are a few of them, with FHA being the focus of this bit of writing. You always hear this term because the administration has a lot of pull in the market – it insures a very large percentage of the loans that have been given out and continue to be given out to homeowners. If you’re going to be buying a home anytime soon, you’re going to want to know all you can about FHA loans because you may end up with one of them. In fact, this particular loan type could be the key to getting you in your home. So the more you know about them, the more you can determine whether or not they will work for you.

What are FHA loans?

refinanceIn the 1930’s during the economic crisis of the depression, an administration was formed to help stabilize and improve the housing economy. It was named the Federal Housing Administration. To put it simply, the administration insures loans that are given by their approved lenders to new and existing homeowners. This insurance reduces the risk taken on by the lender when it approves a loan to a homeowner that does not have a perfect financial history – if a homeowner happens to default on his loan and it is federally insured, the lender doesn’t lose all of the money he has invested in the homeowner. Because of this insurance, approved lenders are more lenient and willing to work with the homeowner whereas a traditional lender, who will be carrying all the risk, is a little more cautious when approving a loan. As a potential homeowner, these loans can work very much to your benefit – depending on your financial situation – but they are particularly helpful if your financial blueprint is spotty or marred.

The most attractive feature of an FHA loan is the ease of acquiring one – they are the easiest loan to secure for a real estate purchase. As a potential homeowner, more than likely you’ve heard that you have to have a huge down payment, perfect credit, money for closing costs, etc. You’ve probably also heard that if you’ve gone bankrupt, good luck getting into a home for seven years after the bankruptcy has been completed. There are fewer loan restrictions on a federally insured loan, so a lot of these barriers can be taken out of the equation. If your credit is subpar, it’s okay; you won’t be kicked directly out of the system. The down payments are usually much lower than typical loans so it’s much easier to afford them, and the closing costs can be added to the loan, meaning you may not have to pay those up front.  In terms of bankruptcy, if you have a recent bankruptcy on your financial blueprint, you may still be able to qualify. The bankruptcy just needs to be at least two years old. During that time you will need to have built up your credit score a bit, and your financial history will need to be free of any possible negative discrepancies.

What are the loan qualifications?

While an FHA loan is easier to get than a conventional loan, there is still a list of requirements that must be met before you can qualify. Following is a short list of some of them:

  • You must be a legal resident of the United States and you must have a social security number.
  • You have to be the legal age of an adult.
  • You must have a good work history, which includes having the same employer for at least two years.
  • If you have ever gone bankrupt, the bankruptcy must have occurred at least two years prior to filing for the loan.
  • If you have ever had a foreclosure, that needs to be at least three years prior to the loan filing.
  • If you have gone bankrupt or had a foreclosure, your credit history must show that steps have been taken to rebuild that credit; you need spotless credit history.
  • The home has to be your primary residence for at least a year.
  • You will need an appraisal on the home. This appraisal will need to be done by a federally approved appraiser.

If and when you meet these loan qualifications for federally insured financial help, you’ll need to discuss any additional requirements with your agent and/or lender. Federal loans are there to help you get into a home when you may not be able to otherwise, so they are worth looking into when you’re ready to make your purchase.