What is an FHA loan and do I qualify?
In 1934, Congress established the federal housing administration. This agency built the foundation for more affordable loans, enabling many Americans to buy a home with little money down and low interest rates. The government insures lenders against borrower default on FHA loans, which reduces the risk to lenders and allows them to offer lower interest rates. Additionally, the FHA has set fairly liberal underwriting guidelines that make FHA loans available to a large group of people. This high demand also helps keep the interest rates low.
If you are looking to buy a home with little money down, an FHA loan may me right for you. To help you know if you could qualify for this type of loan, consider the following guidelines:
The past two years of complete income tax returns with schedules and W-2s as well as the past two months of pay stubs are used to establish your income. Your monthly gross income (before taxes) is used to determine the loan amount you can qualify for.
Your housing ratio should not exceed 29% of your monthly gross income. This means that the amount you pay each month to cover the principal, interest, taxes, and insurance for your home divided by your monthly income should not be greater than 0.29.
Your total debt ratio should not exceed 41% of your monthly gross income. This means that your mortgage payment, auto payment, and any other debt lasting more than 10 months divided by your monthly income should not be greater than 0.41.
If you have filed for bankruptcy, you must be at least one year into payout before you can qualify for an FHA loan.
Most FHA loans require a down payment of 3% of the cost of the home. Unlike some other types of loans, this does not have to come from your savings or reserves. The down payment can come as a gift from a family member or from a down payment assistance program.Although the FHA set general guidelines, individual lenders may have additional guidelines for the area where you live. Additionally, lenders that are well acquainted with FHA loans may be able to work around some of the general guidelines, so it is important to shop around for a good lender that is knowledgeable of FHA loans.