What is an FHA Loan
The goalposts have moved quite a lot over the last few years for anyone trying to secure a home loan. All of these added rules and regulations mean, bottom line, that many families who were once able to secure a home loan or refinance their property are now deemed unsuitable for whatever reason. Just because you could get a home loan a couple of years ago doesn’t necessarily mean that you can get one now, not unless you are one of the “chosen few”. Anyway, don’t get too down-hearted, because that’s where the FHA comes in. The FHA, or Federal Housing Administration for those who don’t talk in short-hand, have been around since the Great Depression of the 1930’s, and since then have insured a massive 37 million mortgages in the United States.
What is an FHA Loan
The FHA is a government insurer, even though they’re not a government agency but a private corporation. Anyway, with an FHA loan you can get approved for many more purchase or refinance loans without having to put down a great lump sum, making them particularly popular amongst the first time buyers who very often don’t have a great lump sum to put down. That isn’t to say that they hand out FHA loans “willy nilly”, they have very specific income, property and credit criteria which must be reached before a mortgage is approved, but the good thing is that it genuinely means that you’ll have the capacity to pay back your home loan and hopefully not end up drowning in debt and being eventually evicted from your home sweet home.
Although the criteria does vary from state to state (doesn’t everything?), here are a few of the general specifics.
Income Requirements for an FHA Loan
This is important because if you don’t have sufficient income to repay the loan, how are you gonna pay it? So, in order to qualify for an FHA loan the FHA uses two separate DTI (Debt to Income) Ratios.
- Top Ratio – states that the expenses of your potential new home (mortgage payments, insurance and tax) must not exceed 31% of your total income.
- Bottom Ratio – if the top ratio is okay, then they move along to the bottom . . . For these you’ve got to make sure that the expenses including the above, plus credit card payments, student loans, car payments and anything else you have “on the monthly” doesn’t exceed 43% of your total income.
- Credit Score – must be 620 or higher, so check that out before you even start.
The maximum amount of FHA loan available is dependent upon the state where you want to buy a house, after all, housing in some areas is much more affordable than it is in others. The lowest maximum FHA loan allowance is around $270,000 (don’t quote me on that, it’s for reference only!) and the highest around $730,000 (ditto), in the more expensive locations.
During 2009 there were an estimated 3,000,000 applications for FHA loans, so they must be doing something right don’t you think? The FHA are helping people to buy their own affordable homes.