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The Ultimate Guide to Basic FHA Insured Home Mortgages

By IntFormalities
Updated on February 21, 2023
Estimated reading time: 7 minutes

Buying a home is an important decision which needs lots of financial planning. But no matter how much you prepare in advance, saving up for a down payment is not always easy. The requirements to qualify for a mortgage are often too many, especially if you’re a first-time home buyer.

However, there’s a government-backed insured mortgage that may come to your rescue. Have you heard about the Basic FHA Insurance Home Mortgage? We’ll take a close look at this insured loan.

The Ultimate Guide to Basic FHA Insured Home Mortgages
The Basic FHA Insured Home Mortgage is perfect for first-time home buyers who cannot obtain conventional mortgage loans due to their strict credit score and down payment criteria.

What is a Mortgage?

Mortgages are loans used to acquire real estate, particularly a home. They can either be accessed from banks, credit unions or licensed lenders. When you apply for it, real estate is used as collateral. You must make regular payments to the lender until the loan is fully paid.

Collaterals are generally assets that are used as a guarantee for loan repayment. In this case, the lender can claim the home if you fail to complete your mortgage repayment.

Mortgages come with a longer repayment period, often years, with fixed or variable interest. Mortgage payments vary according to the lender involved. These lenders provide the interest rate, the duration of the loan repayment, the down payment, and your creditworthiness.

What are FHA Mortgage Loans?

FHA mortgage loans are sums of money you can borrow. They are insured by the US Federal Housing Administration and are intended for first-time home buyers. Since these mortgage loans are backed by the federal government, they are considered safe and secure compared to typical mortgages.

What’s the Difference Between FHA Mortgages and Typical Mortgages?

FHA loans are typically designed for first-time home buyers with low credit scores or short histories. Typical mortgages require a relatively high credit score, as it is proof of your creditworthiness. However, while most conventional mortgages require a credit score of 620, you can apply for FHA with a credit score of 500

A credit score is a number between 300 to 850 that lenders and other financial institutions use to ascertain your creditworthiness – your ability to pay back loans. You can improve your credit score by paying your bills on time, using a secured credit card, asking for higher credit limits, and disputing any credit report errors.

Additionally, FHA loans may not require you to make a sizable down payment like typical mortgages. In typical mortgage arrangements, you must make a 20% down payment for the home. However, with FHA, you can pay between 3.5% if you’ve got a credit score of over 580 and 10% if your credit score is between 500 to 579.

You must pay FHA mortgage insurance, which is designed to protect the lender should you default on your repayment terms.

Who Provides FHA Loans?

While the basic FHA-insured home mortgage is guaranteed by the FHA, they do not lend these loans. The loans are provided by FHA-approved private lenders who may have their own conditions for eligibility – just like with conventional mortgages. 

Eligibility Requirement for FHA Loans

While specific requirements may vary between FHA-approved lenders, the following are the basic requirements:

  • A credit score of 500 to 579 with a 10% down payment or a credit score of 580 and above with a 3.5% down payment
  • Verifiable income through tax returns, pay stubs, and bank statement
  • A debt-to-income (DTI) not greater than 43%. Your DTI is calculated by combining your monthly payments and dividing the amount by your pre-tax income 
  • A loan-to-value (LTV) ratio of 96.5% or lower. Your LTV compares your loan amount to the home’s market value. This is another way to express down payment requirements. If your credit score is 580 and above, you’d be making a down payment of 3.5%, so your LTV ratio will be 96.5% or lower

The Department of Housing and Urban Development (HUD) sets the limits and criteria to get access to mortgages.

How To Apply

You are to carry out the following actions to apply for a HUD mortgage: 

  • Find an approved private lender. Several banks, credit unions, mortgage brokers, financial institutions, and lenders offer this mortgage to first-time home buyers. Since there are several lenders, you’d need to compare and choose the best rates. You should request quotes and requirement criteria. 
  • Apply for an FHA loan. After finding and choosing a lender, the next step is to fill out an FHA application form. Many lenders may allow you to submit the FHA loan application online. However, some lenders will connect you to a loan officer who will complete your application via email or phone. 
  • Provide basic information. Your chosen lender will require you to provide basic details and supporting financial documentation for pre-approval and approval.

This application is the same across the country; you can find other details on the FHA website.

Documentation Required

You will be asked to provide the following documents during the application process:

  • Tax returns and W2 forms for the last 24 months
  • Bank statements from the last 2 months
  • Recent pay stubs
  • Financial statements for your other assets if any
  • Names and addresses of your employers from the last 2 years 
  • Recent Profit and Loss statement if you’re self-employed 

What Happens After You Apply?

After applying for a basic FHA loan, your application goes through a review process. The lender goes through your application and supporting documents to determine your eligibility. 

You will then be alerted to schedule a home inspection for the proposed home you plan to purchase. This is an essential stage in the process, as it may reveal some hidden issues with the property which the seller can correct. 

If the application is successful, you will be notified by email or phone.

How Long Does It Take Before Approval?

The duration from application to approval might range between 30 to 60 days. This is because your preferred lender might involve several application and underwriting processes. 

You can also read, “How to Apply for Child Tax Credit in the US.”

What is the Loan Limit?

The FHA, through the HUD, sets the loan limits on mortgage payments. The current floor limit for single-family FHA home loans is up to $472,030 for most parts of the country. 

You can borrow up to $1,089,300 for a single-unit home if you’re looking for a home in a high-cost neighborhood. However, if you’re purchasing two units in a low-cost neighborhood, you can borrow up to $604,400. For high-cost areas, you have a loan limit of $1,394,775. 

What if Your FHA Loan Application Gets Declined?

If your application for an FHA loan gets declined, it could be for a host of reasons: 

  • You don’t meet their requirements.
  • Your supporting documents weren’t submitted properly. 
  • Your credit score is too low to be considered. 

In any case, you can always re-apply or select a different FHA-approved lender. You can ask your friends and family for recommendations. 

Making Your Dream Home a Reality with an Insured Mortgage

The Basic FHA Insured Home Mortgage is perfect for first-time home buyers who cannot obtain conventional mortgage loans due to their strict credit score and down payment criteria.  

With a basic FHA loan, you can borrow within the loan limit and purchase your dream home with as little as a 3.5% down payment. On the plus side, these HUD mortgages come with flexible repayment plans that you can sufficiently pay throughout the loan. 

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