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FHA Loan Explainer from Your Lake Region Bank Lending Team

Are you thinking about purchasing a new home in the next year? Congratulations! The home buying process is exciting, but it can also be confusing and stressful. The Lake Region Bank team is here to help you understand the process so you can find the right financing for your new home. Read our FHA loan explainer, then contact us!

What Is an FHA Loan?

An FHA loan is a home loan that is insured by the Federal Housing Administration. Because the government’s backing your loan, your lender can offer you better terms, including lower credit score and down payment requirements. This makes an FHA loan a good option for someone who struggles with those issues.

If you qualify, you can use an FHA loan to purchase your primary home (in other words, you can’t use an FHA loan to buy a vacation home or second home). Your primary home can be a single-family house, a condominium, or a multifamily home such as a duplex or triplex. You can also use an FHA loan to purchase a manufactured home that is attached to a permanent foundation. 

What are the benefits of an FHA loan?

Low Down Payment

A down payment is the initial, upfront payment you make on your home. Most home loans require a down payment. A low down payment makes home ownership more accessible to people with limited cash. 

Low Credit Score

Most home loans require a minimum credit score. Your credit score is one way your lender can predict how likely you are to pay your loan back on time. Your credit score pulls data from your credit reports, which include your credit card and other loan history.

An FHA loan has lower credit score requirements than a conventional mortgage does. It is possible to secure an FHA loan with a credit score of 500; however, you will need to make a down payment of 10 percent or more. If you have a credit score of 580 or higher, you can qualify for a 3.5 percent down payment. However, these are the minimums required by the FHA. Your lender may require a higher credit score.

Generous Debt-to-Income Ratio Limits

Debt-to-income ratio is a number your lender uses to measure how much of your monthly income goes to loan payments. The lower your debt-to-income ratio, the less debt you owe, and the more likely a lender will approve a new loan. The FHA allows for the highest debt-to-income ratio. That makes an FHA loan a good option for borrowers with a lot of student loan debt.

Gifts Allowed

Have a relative or friend who wants to help you out with your down payment? That’s not a problem when you apply for an FHA loan. All you need to do is have the gifter sign a letter provided by the bank that includes their contact information, their relationship to you, the gift amount and a statement that they are not expecting you to pay the gift back. They may also need to provide a bank statement that shows they have the funds they are gifting you.

What Are the Drawbacks of an FHA Loan?

An FHA loan may be a viable choice for financing your home, but you should be aware of the drawbacks of this type of loan before you make your final decision.

FHA Requires the Home Meet HUD’s Minimum Standards

Every FHA loan requires an appraisal to confirm the home you are buying is safe and livable. This is in addition to any home inspection you may negotiate in your home purchase. The appraisal tells the lender that your home is a worthwhile investment and worth what you are paying for it. Sometimes, FHA appraisals uncover issues that need to be resolved before you can close on your home or disqualify a property from FHA eligibility.

Requires Mortgage Insurance for the Life of the Loan

Mortgage insurance protects your lender from risk in case you are unable to make your mortgage payments. Mortgage insurance makes the loan safer for your lender, but it will cost you a little extra in your monthly loan payment.

While you may be able to remove the mortgage insurance requirement from a conventional loan, an FHA loan requires mortgage insurance for the life of the loan unless you’ve put down at least 10 percent. In that case, you pay FHA mortgage insurance for 11 years.

Limits the Loan Amount (Varies by County)

FHA loans have limits on the loan amount that could make certain properties out of your reach. In Kandiyohi County, for example, this limit is $472,030 for a single-family home and $604,400 for a two-family home (for reference, the median sale price in Kandiyohi County in 2022 was $183,000). These limits vary by county, so be sure to check with your Lake Region Bank loan officer to discover what your limit may be.

How Do I Qualify for an FHA Loan?

Learning if you qualify for an FHA loan is easy. All you need to do is reach out to Lake Region Bank’s friendly, knowledgeable lending team. We can help you determine your credit score and debt-to-income ratio to help you understand how much home you can afford and if an FHA loan is the right fit for you. We recommend speaking with our team three months to a year from when you want to start home shopping. That way, you can learn if you need to build your credit, discover how much you need to save for your down payment, and narrow down your home search. Ready to start your home buying process? Lake Region Bank is here to help! Get started today.

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