A Look At How FHA Loans Work

If you're looking to buy a new home, you might want to get an FHA loan if you qualify. These loans are often easier to get, which is why they are popular with first-time home buyers. You'll still need fairly decent credit and a good debt-to-income ratio, but qualifying is usually easier than with private mortgages. Here's how these loans work.

They Don't Require A Large Down Payment

Coming up with a big down payment is often difficult when you're buying your first home because you don't have a home to sell to get cash from equity. FHA loans still require a down payment, and the percentage you need to pay is determined by your credit score. That's one reason it's good to work on your credit score before applying for a loan. It could make a difference in the amount of money you have to come up with for your down payment.

The Debt-To-Income Ratio Plays An Important Role

The debt-to-income ratio is a number that reflects how much debt you have related to the amount of money you have coming in each month. If you have too much debt, the mortgage lender sees you as too high of a risk for a loan. If you have time to plan ahead, try to pay off as much debt as possible before you apply for an FHA loan as that improves the debt-to-income score. The score for an FHA loan is more lenient than scores needed for private mortgages, which is another reason these loans are popular.

Lenders feel comfortable loaning with more lax requirements because the loans are backed by the government so the risk to the lender is lower. Still, you want your finances to be as favorable as possible so you get a good interest rate and terms on your loan.

An FHA Loan Might Work With Credit Issues

If you have a bankruptcy or foreclosure on your credit report, you might have difficulty getting a loan from a private lender. As long as your current finances are in good shape, you might qualify for an FHA loan as long as the waiting period has passed. The waiting period for bankruptcy depends on whether you file Chapter 7 or Chapter 13. The waiting period for foreclosure begins as soon as your house sells rather than when it was foreclosed upon. So if your house is vacant for a long time before it sells, you may have a long wait on an FHA loan too.