Various programs exist that allow borrowers to obtain an FHA loan with very little money out of pocket initially. Finding a loan for absolutely zero money down and no closing costs or administrative fees, however, is not so simple.
More About FHA
The Federal Housing Administration or FHA is a governmental agency that provides mortgage insurance for loans made by FHA-approved lenders throughout the United States and its territories. Mortgage insurance protects the lenders if the borrower does not repay the loan or defaults; this allows lenders to make loans to people who may not typically qualify for a home loan. FHA insures more mortgage loans than anyone else in the world.
Benefits of an FHA Loan
There are some great reasons to apply for an FHA loan:
- You have a low credit score and bad credit history
- You want to keep your monthly payments low
- You do not have much money for a down payment
An FHA loan is not actually a 100 percent mortgage loan-a loan that covers the entire cost of the home. Instead, it covers around 96.5 percent of the purchase price of the dwelling. This means that you will be borrowing 96.5 percent of the cost of your home and paying 3.5 percent out of your pocket or savings. Many mortgage loans require you to present up to 20 percent of the purchase price as a down payment and do not allow you to borrow the money for a down payment. However, this type of FHA loan gives you multiple options for obtaining the remaining 3.5 percent of the purchase price. Examples include:
- Specific types of loans
- Family-financed loans
Since you would not have to come up with any money for a down payment up front, this loan is considered a 100 percent loan. Other lenders may have offered 100 percent loans in the past-like Fannie and Freddie Mac-but with the real estate crash, most lenders have eliminated this service.
Another benefit of a 100 percent FHA mortgage are lower mortgage insurance payments; in some cases, the borrower only pays 0.5 percent of the total loan amount as insurance, which is about half of what traditional loans require. This mortgage insurance is included in the monthly payments; paying less means that your monthly payment is lower. After five years of the loan, the mortgage insurance is generally completely paid and your monthly payment goes down even more.
Closing costs are also regulated by the FHA, which keeps them lower than with a traditional loan.
If you are interested in buying a home and don't have enough money saved up for a traditional loan, you should find out if you qualify for this type of mortgage.
Qualifying for a FHA Loan
All home loans are not eligible for FHA insurance-certain criteria set up by the FHA need to be met in order for the borrower to qualify.
- Steady employment: The lender will require proof of employment for up to two years with your tax returns and W-2s. Having the same employer during this time may increase your odds; if you change jobs frequently or have long periods of unemployment, you may have a difficult time qualifying. Self employed individuals may have an easier time qualifying for this type of loan.
- Current Credit Status: Lenders will look at your credit history and if you have a history of late payments, you may have problems. Any bankruptcies should been discharged at least two years before your application and foreclosures at least three years before. Even if you have had some credit problems, if you are currently rebuilding your credit with a minimum credit score of 620 and are reestablishing your credit history, you can still get approved.
- Income and Debts: The lenders will also compare your combined household income to the combined household debts-including credit cards, student loans, and auto loans. If your debt load is more than 30 percent of your income, the lender may not approve you for a FHA loan. However, some lenders can be flexible and will take all of your circumstances into consideration when making any loan determinations.
Before you apply for an FHA loan, you should do some homework in regards to your financial situation and credit history. Addressing any questionable areas like unpaid bills or high debt load before you apply may make your application go smoother. You also should determine how much you can afford to borrow before speaking with lenders.
How Much Can I Borrow?
A 100 percent FHA mortgage does impose some restrictions on the amount of the loan, depending on the section of the country that you are looking to buy in and what the existing property values are in that area. In some parts of California, New York, and other states, you can get an FHA loan for up to $729,750 to cover the cost of a home. In other areas, the amount may be closer to $400,000.
Just because you may be allowed to borrow over $700,000, it does not mean that you should aim to borrow that much. Make sure that your desired home fits into your monthly budget; knowing how much you can spend may make your loan application an easier process.
Finding an FHA-Approved Lender
Finding a lender is easy using the tool from the U.S. Department of Housing and Urban Development or HUD.gov locator. You can find lenders in your area and research their business processes. If they appear honest, you should discuss details with the organization before you submit an application.
You may also apply for a loan through online-based companies like Lending Tree, specifying that you are looking for an FHA loan with 100 percent financing, or at least, as little a down payment requirement as you can get.