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How Does a FHA Mortgage Work?

fha mortgageFHA backed loans allow borrowers with credit scores below 620 to be able to own a house. The loans allow
borrowers to offer down payments as low as 3.5 percent and come with flexible underwriting standards. The mortgage is designed for first-time buyers but available to everyone.

FHA Mortgage Approval

The FHA loan is insured by the Federal Housing Administration (FHA). To qualify for the loan, a borrower and the property to be bought must meet some minimum criteria, which include:

  • Borrowers must have a credit score of at least 500.
  • Borrowers must have a debt-to-income ratio of 43 percent or lower
  • A down payment of 3.5% or more is required for the loan

The property to be bought by an FHA loan must have a roof that is intact. Apart from this, it should have utilities that are “turned on” and independent of the property. Finally, water should drain away from the home and not towards it. You can read more requirements of FHA loans here.

FHA Lenders

The FHA is an insurer and not a lender. Therefore, if you are interested in applying for an FHA loan, you must work with lenders approved by the FHA. The lenders may offer different interest rates and costs—even on the same FHA loan.

Underwriting standards, services and costs vary among mortgage brokers or lenders. Therefore, it’s important for borrowers to shop around to find the best lenders. However, before starting to shop, it helps to have a good credit score.

There are a number of companies that can help to improve your credit score. One of the companies is Lexington Law. Read this Lexington Law review to find out how the company works.

Mortgage Insurance

There are two mortgage insurance required for all FHA loans. The first is an upfront premium that costs 1.75% of the cost of the loan. This premium is paid when you are approved for the loan. You can also finance it as part of the loan.

The second premium is known as the annual premium, although it is paid on a monthly basis. The premium varies depending on the amount borrowed, term of the loan and initial loan-to-value (LTV) ratio.

Special FHA Loan Programs for Buyers

The popularity of FHA loans is not only pegged on the low down payment and flexible underwriting options. The FHA also offers a range of products for buyers with specific mortgage needs. These products include:

a) FHA Back to Work Mortgage

This mortgage program is designed for buyers with a recent foreclosure, bankruptcy or short sale that was as a result of job loss. This programs waives the normal waiting period after a derogatory event, like the aforementioned. With this program, borrowers can purchase a home just after 12 months from the date of the unfortunate event.

b) FHA Good Neighbor Next Door Program (GNND)

This program grants firefighters, emergency medical technicians, law enforcement officials and teachers special homes at 50% off the list price. Qualified individuals just need to make a down payment of $100 to be approved. The GNND program can be used by both first-time home buyers as well as repeat buyers.

c) FHA 203(k) Home Construction Loan

The FHA 203(k) program allows borrowers to finance construction and home improvements into their FHA loan. Improvements eligible under the loan include roof replacement, plumbing and other critical repairs. The 203(k) program can also be used for minor home improvements such as purchasing appliances.

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