A Federal Housing Administration (FHA) loan is a home mortgage a bank or a mortgage lender issues that the agency approves. Unlike other conventional loans, it requires a lower minimum down payment.
Additionally, since the government insures the FHA loan, loan lenders are willing to lend money to borrowers with low credit scores and not enough cash to put down a down payment. In short, this loan is an excellent choice for first-time homebuyers or families with low or moderate incomes.
What Are the Requirements for an FHA Loan?
You need to meet specific requirements before you can get an FHA loan. First, your credit score can be as low as 500. If it falls between 500 and 579, you can get an FHA loan with a down payment of 10 percent. On the other hand, if your credit score is at 580 or higher, you can avail of an FHA loan with a down payment of 3.5 percent.
Banks and mortgage lenders will also look at your work history for the past two years. They want to know if you settled your bills. However, people behind their federal student loan payments or income tax payments might get dismissed unless they sign a satisfactory replacement plan.
Do you know how much home you can afford?
Most people don’t... Find out in 10 minutes.
Today's Mortgage RatesBesides your work history, they also want to know if you can pay your loans on time. They will require proof of steady income. You can show this by providing these documents: your tax returns, current year-to-date balance sheet, and profit-and-loss statement.
Lastly, it requires a debt-to-income (DTI) ratio of less than 50. It means that your total monthly debt payments should not exceed 50 percent of your pretax income. It includes all the debts you are not actively paying.
What Is Debt-to-Income Ratio?
A debt-to-income (DTI) ratio refers to the percentage of your gross monthly income for managing your monthly debt payments. Banks and mortgage lenders also check your DTI to determine your borrowing risk.
There are two types of DTI: a front-end DTI ratio and a back-end DTI ratio.
A front-end DTI ratio is a calculation that determines how much of your gross monthly income goes into your housing costs, such as mortgage payments, mortgage insurance, etc. According to the FHA guidelines, the maximum front-end DTI ratio ranges from 31 to 40 percent, depending on the borrower’s credit score.
Meanwhile, the back-end DTI ratio is a calculation that determines the percentage of your gross monthly income that goes to other debt types, such as credit cards and car loans. In short, this is your total DTI ratio. It is the deciding factor that banks and mortgage lenders use to know whether you are qualified for the mortgage you are applying for.
How Does One Calculate Their Debt-to-Income Ratio?
To calculate your DTI ratio, you need to add up all your monthly debt payments.
Next, you have to divide them by your gross monthly income. If you are not familiar with it, it is the amount of money you have earned before your taxes, and other expenses are deducted.
In cases where a borrower does not meet the criteria for a mortgage, a compensating factor can offset the negative in their qualifications.
There are many types of compensating factors. They are cash reserves, residual income, minimal payment shock, a large amount of savings, credit history proving the borrower can devote a huge portion of their income to housing expenses, and more.
Final Thoughts
An FHA loan is an excellent choice for new and first-time homebuyers with a limited budget. It gives you a chance to own a home without having a lot of cash for a down payment.
Furthermore, you can get an FHA loan with a credit score as low as 500, and you can receive it even if you have tax liens, foreclosures, or bankruptcies in your credit report.
Now, if you’re looking for mortgage lenders that offer FHA loans and other mortgage options, you should consider MidAmerica Bancorp, Inc.
At MidAmerica Bancorp, Inc, we are committed to providing the best services for you. We offer some of the best home loans in the market. We are licensed in Illinois, Indiana, Florida, Michigan and Wisconsin. Contact us at (708) 237-4050 to learn more about our offerings today!
Do you know how much home you can afford?
Most people don’t... Find out in 10 minutes.
Today's Mortgage Rates