Buy a New Home with Little Down with the Help of FHA Loans
Are you interested in purchasing a home for sale in Austin, or elsewhere? If you have a credit score of at least 600, you may qualify for an FHA loan even if you have only a small amount to put down on your home purchase. Of course, before you apply for one of these loans, it is helpful to learn more about FHA loans, how they work and how your credit score can have an effect on the terms and conditions of your loan. To that end, here are the answers to some questions that are commonly asked about FHA loans.
What are FHA Loans?
In the simplest of terms, FHA loans are loans that are insured by the Federal Housing Authority. Since the loan is backed by the FHA, lenders can rest assured they will not have to write off the loan if the borrower defaults on the payments. As such, lenders are more willing to approve large mortgage loans.
Who is Eligible for an FHA Loan?
While there are no income limits on who can obtain an FHA loan, borrowers must meet certain debt to income ratio guidelines. In most cases, the borrower must have a debt to income ratio that is better than 29/41. Some programs, however, allow a ratio of up to 55 percent. Borrowers must also have an acceptable credit rating.
How Much Can I Borrow with an FHA Loan?
Certain limitations have been placed on how much can be borrowed through the FHA program. These limits are typically determined according to the home prices in the area where the home is located. Interested borrowers can obtain the current limits by visiting the HUD Website.
What are the Advantages of FHA Loans?
While an FHA loan is not for everyone, there are several benefits to getting a loan through this program. These benefits include:
- A home may be purchased with a down payment of as little as 3.5 percent
- Gifted money may be used toward the down payment and closing costs
- Borrowers who wish to prepay on the loan are not penalized
- Funding can be obtained for home improvement through the 203(k) rehab loan program
Since FHA loans are backed by the government, they may also be assumable and lenders may provide more leniency to borrowers who are facing financial troubles.
What are the Disadvantages of FHA Loans?
Although FHA loans offer several benefits, there are some potential drawbacks. For example, since the FHA is guaranteeing the loan in the event of a default, the borrower is charged an upfront mortgage insurance premium (MIP) that is equivalent to 1 percent of the loan amount. Borrowers must also pay an ongoing fee each month. This way, if the borrower defaults on the loan, the FHA can use the collected insurance premiums to help pay off the loan. As such, borrowers with good credit and little money down may want to research other offers that may be available.