If you're having difficulty obtaining a home loan, an FHA loan may be your ticket to owning a home. The Federal Housing Administration (FHA) provides mortgage insurance to an approved lender in the case that the homeowner, you, default on the loan. This is safer for the banks, because, they are promised a certain amount of money by the US government by giving the loan.
This program was started by the US Housing and Urban Development program (HUD) as a way to allow Americans with bad credit (or no credit) to own a home. That being said, FHA loans are incredibly easy to obtain compared to other home loans. Over the years, the FHA has helped thousands upon thousands of Americans become homeowners.
The Basic Requirements
While the FHA loan process is fairly lenient, there are some requirements you must meet in order to obtain a home loan.
Income - Your income level is very important in determining whether or not you'll be eligible for an FHA loan. When you apply for the loan, you will be asked to give information about your income. The FHA wants to make sure that you will be able to make monthly payments on a home. That said, the goal of the FHA is to provide home loans to those in the middle-income and low-income brackets.
Credit - Even though the FHA was designed to help those with not-so-great credit, they will require a credit check. You don't need to have to have perfect credit with the FHA as you would with a more conventional loan.
Your credit is a general indicator of whether or not you'll be able to make payments. If you've had a shaky past with your credit but have shown that you've been making regular payments on things, you should be okay. One nice thing is that if your credit is too low or you don't have any credit, you can have someone co-sign on your home loan -- and they don't even need to live with you.
Debt to Income Ratio - When you apply for your loan, you will be asked to list any debts. The FHA will take the amount of income you earn per monthly and subtract the amount of monthly debt you have in order to figure out if you'll have enough money each month to make ends meet and afford a home loan.
There are some additional requirements you must meet in order to qualify for an FHA Loan if you've filed for bankruptcy or foreclosed on a home.
Bankruptcy - If you've gone through bankruptcy, you don't have to wait 7 years before you can apply for a home loan. When getting a home loan through the FHA, you only have to wait two years since your bankruptcy's been completed. That said, in the two years since your bankruptcy has been discharged, you'll have to show that you have properly maintained your credit.
Foreclosure - If you've foreclosed on a home, you must wait at least three years after the foreclosure before you qualify for an FHA home loan. You must also show that you have had good credit for the past two years in order to qualify for the loan.
FHA Loans In Your State
The FHA works differently in each state, so depending on which state you plan on buying a home in, you may have additional requirements. The FHA loan limits vary by state, so it's important to know how the FHA program works in the state you plan on living in. Some states even offer perks for buying a home, which can make home ownership that much more worthwhile. You'll want to check out the FHA home buying programs in the state you plan on living in to learn more about your local program.
FHA Loan Checklist
You'll need a few things in order to apply for a loan. It's a good idea to assemble all the paperwork before getting started with the application. Here's what you'll need:
- Addresses to your residences for the past two years
- Social Security numbers for anyone on the loan (including any co-signers)
- Names and location of your employers for the past two years
- Gross monthly salary at your current job
- Information for all checking and savings accounts
-Names and addresses where each account is held
- Information for all open loans
-Names and addresses of each lending institution
-How much is owed on each loan
- Information any real estate you currently own
- Approximate value of all personal property
- Certificate of Eligibility and DD-214 (if you or anyone on the loan is a veteran)
- All pay stubs for the current calendar year
- W-2 forms for the past two years
- Personal tax returns for the past two years
- Current income statement from your employer (a business balance sheet if you're self-employed.)
- Your credit report (all three credit reports are recommended)
Choosing a Home
When applying for an FHA loan, it's important to choose a home within your price range. The FHA has determined that your house payment should be about 30% (or less) of your gross income. After figuring out how much you can spend on a house, then you can go shopping for a home within your budget!
Shopping for a home can be stressful, so it's a good idea to figure out what kind of home you're looking for ahead of time. By putting together a wishlist of what kinds of things you'd like in a home, you'll be better prepared when touring various homes with a realtor.
Another important tool to bring along when checking out houses is a checklist. By filling out a checklist for each home you visit, you can easily remember small details of each house you've visited. This will help you make a more educated decision on which home is (or isn't) for you.
Fulfilling the FHA loan requirements may seem like a stressful process, but qualifying for this type of loan is fairly simple (especially compared to private loan requirements.) After the initial approval, the rest of the loan process is easy and you'll be in your new home in no time.
The FHA was designed to help you, and with that in mind, they have created a huge number of tools in order to take a lot of anxiety out of the home buying process. They provide a number of guides on what to do in order to qualify. If you find that you do not initially qualify for a loan, you will always be able to apply again in the future.
© 2011 Melanie Palen
Micheal from United Kingdom on January 31, 2012:
We could do with an initiative like this, over this side of the pond.
The housing market, would have to work really hard, to get into the doldrums.
It is as dead as, Monty Pythons Parrot.
No plans coming from anywhere and house prices still sliding off the cliff.
Obama seems to have a clue.
Marissa from United States on January 31, 2012:
Great information about FHA, Mel! It is a great program, helpful to first time home buyers, like my husband and me when we bought our house six years ago. Thanks for sharing!
anthonyjames1970 from UK on January 30, 2011:
Yeah FHA loans are a great option for the US market it's a shame that this system cannot be applied in the UK. This is a very interesting article melbel, thanks
Melanie Palen (author) from Midwest, USA on January 13, 2011:
Yeah, it's definitely a US market thing. Hello, hello, what country are you from? Perhaps if you wrote a hub on a similar program that's available in your country you could help a lot of people out by informing them about the program. The great thing about hubs is that they explain things in nice bite-sized ways. When you go to a government site, they use a lot of jargon that a lot of people just either aren't familiar with or are just plain annoyed by (I know it's annoying to me.) By writing a hub about something like that, it definitely helps people out by clearing up the air on an otherwise jargon-filled subject. :P
Hello, hello, from London, UK on January 13, 2011:
Sounds great but it only concerns the American Market.
Simone Haruko Smith from San Francisco on January 10, 2011:
This is a wonderful overview! I was not at all familiar with FHA loans before reading this, so I learned a lot. Thanks for sharing!
MortgageGuy from USA on January 08, 2011:
Agreed, FHA loans are a fantastic option. One other advantage is that they only require a 3.5% minimum investment (down payment), fit very well with local down payment assistance programs, and when you use an FHA loan to purchase a HUD foreclosure you may only need to pay $100 down depending on what state you live in. Well written Melbel.