Government mortgage loans are loans that the government makes to people who are seeking to buy a home. These loans are often referred to as Federal Housing Administration (FHA) loans and they are made by the Housing & Urban Development (HUD) department of the government. It is also important to understand the HUD does not actually make these loans directly to buyers to purchase their home but rather goes through the FHA program and uses approved lenders to provide loans through a variety of FHA approved insurance providers who are the ones who provide the loans.
What Are The General Requirements That One Must Meet To Qualify For A FHA Loan?
As of 2018, if a prospective home buyer wants to qualify for an FHA loan the buyer will have to have the following:
- a FICO score of at least a 580 (3.5% down payment) - however if a person has a lower credit score of a 500-579 (10% down payment required)
- agree to pay a Mortgage Purchase Premium (MIP) (usually adds about 0.85 of the entire loan amount annually)
- have an income to debt ratio of at least 43% or less
- must use this home as their primary residence
- must have proof of steady (adequate) levels of income and employment
These loans also allow a buyer to choose between 15 and 30 year fix rates or adjustable term rates for their mortgage. The seller will be responsible for up to 6% of the value of the home in closing costs. However, for those who are struggling to pay for those closing costs right away, there are down payment grant assistance programs available and grants are also accepted.
The FHA loans also allow people to use money that was a gift for their down payment, which can help them be able to afford the initial move into their home in the first place.
FHA Loans Are Not Just For Low-Income Earners & Those With Bad Credit:
Many people hear that the FHA provides government-backed loans and assume that only people with low income levels or those who have a horrible credit history can use these loans. That's actually a misconception and couldn't be further from the truth.
Considering that 40% of all home loans in the US are from the FHA. Moreover, this is a very good loan to start out with for a first time home buyer especially if you are a lower to median income household or have a credit rating that is in the "average to good" zone, but can still be improved.
Of course, if you have a lower FICO score (under 580) you will be paying 10% down payment versus a 3.5% down payment (available to those with 580 score or higher). This will be in addition to a higher monthly interest rate on the FHA loan you receive, making your monthly payment higher and also the amount that you are paying to interest will increase.
Who Is A Candidate For A FHA Loan?
As over 40% of home loans in the US are from the FHA, which means that many people are a candidate for a FHA loan. The following are some of the people who are candidates for these FHA loans include the following:
- borrowers who have a lower credit rating
- anyone that cannot afford a large 20% down payment
- if the down payment you are using has been received as a gift
- if a person's debt-to-income ratio is higher than average
- first-time home buyers
FHA loans are helpful for home buyers with lower credit scores, and those putting less than 20% down payment or those who do not have the credit to get a traditional mortgage.