A lot has been said about today’s economy and how difficult finances can be for millennials and baby boomers alike. With fewer and fewer people choosing to invest on real estate, many have forgotten the benefits of home ownership and property appreciation.
Granting that people have varying financial profiles and resources not being the same for everyone, it is a known fact that residential independence can be difficult to achieve. Owning homes seem to be secondary or even tertiary on the list of people just focused on living in the now. Still, one can never undermine gaining equity and investing on something that appreciates over time.
Thankfully, loans still exist and have only improved over time. With several arrangements and qualifications available to different kinds of people, more Joes and Janes are now able to pursue loans that are very well within their capacity. While there are several loan types, there really are just two kinds at the end of the day: one that is backed-up by the government and one that is extended by commercial lenders sans the government’s assistance.
The FHA Home Loan
Federal Housing Administration (FHA) loans is the first kind. To put into perspective, this particular government agency does not give out money themselves, but only insures FHA mortgage loans. That said, borrowers still claim the loans from commercial lenders but with the direct involvement of the federal government. This arrangement is put in place to help minimize risk for the lender, should a borrower default.
The greatest distinction FHA loans have from conventional ones is that FHA loans are “nicer” to people with low to modest credit scores. Conventional loans may require a FICO score of 620 to 640 for a borrower to be qualified, whereas FHA loans may help even those with a humble score of 500.
For those whose credit scores are at least 580, only a 3.5% down payment is needed to bag a house. For those scoring 500 to 579, a loan may still be extended but will need a 10% down payment. Conventional loans, on the other hand, start at 5% and may reach 20%, depending on the sum of the loan. Generally, FHA loans work best for more people as standards and requirements needed aren’t as difficult to comply versus those from conventional loans.
According to FHA.com, the following requirements are needed to apply:
- Address to your place of residence (past two years)
- Social Security numbers
- Names and location of your employers (past two years)
- Gross monthly salary at your current job(s)
- Pertinent information for all checking and savings accounts
- Pertinent information for all open loans
- Complete information for other real estate you own
- Approximate value of all personal property
- Certificate of Eligibility and DD-214 (for veterans only)
- Current check stubs and your W-2 forms (past two years)
- Personal tax returns (past two years), current income statement and business balance sheet for self-employed individuals
Is the FHA Home Loan for you?
Having established this, conventional loans work best for people with impressive credit scores. To clarify, an upside to conventional loans is that loans with 20% down payment no longer needs Premium Mortgage Insurance. FHA loans are the opposite as they require mortgage insurances all throughout the life of the loan regardless of how much one forks in for upfront deposits.
It is always best to review both your credit report and credit score before applying for an FHA loan. The sooner you’re able to determine your credit rating, that faster you’re able to figure out which kind of loan is best for you—conventional or FHA. Remember that both have their own benefits. If you’re one who does not have a 620 to 640 rating, perhaps the best mortgage loan for you really is from the FHA.
It is also vital to remember that saving ahead is equally important to budgeting and seeing how much these loans will cost you. These transactions require several fees settled on the onset. Consider your debt-to-income ratio, too, as this may be a deal-breaker to bagging your loan of choice.
Once you’re firm on pursuing an FHA loan, the secondary step to take is looking for an affiliate FHA realtor. Making use of hud.gov‘s search tool will make things easier for you. If you don’t have a realtor’s name in mind, type your city and state in the box that asks for a lender’s name. You should see a list of FHA-approved lenders after that.