An FHA loan may be best described as a mortgage that is issued by an approved qualified lender or bank, and subsequently insured by the Federal Housing Administration, or the “FHA” as it’s more popularly known. As a general rule, all FHA loans are specifically designed for Charlotte home buyers that may not be in a position to make hefty down payments needed for conventional loans.
As of 2023, FHA loans permit approved homeowners to borrow amounts up to 96.5 percent of the total value of the house. The remaining 3.5% down payment requirement may be allowed to be in the form of either a gift or a grant. This aspect makes FHA loans very popular today, especially with first-time homebuyers, first responders, teachers, etc.
Current FHA loan limits for a single (1) property in North Carolina are typically $473,030, and even for select high-cost counties.
FHA Loans: A Historical Perspective
FHA loans were originally introduced shortly after the country went through the economic turmoil of the Great Depression in the 1930s. During that traumatic time, both defaults and the resulting foreclosures skyrocketed. As a direct response to this state of affairs, the government then had created federally insured loans in a bid to give both the mortgage holders and lenders complete peace of mind while reducing lender risk considerably and also stimulating the overall housing market, as well.
By insuring mortgages, the govt. reassured the lending agencies so that they were (and still are) far more inclined to issue considerably larger mortgages.
FHA Loans: Who Can Apply?
FHA loans are usually offered to buyers who typically have stable income levels and decent credit. The program is not reserved for just first-time buyers, any eligible borrower can apply. A borrower with lower credit scores (below 580) may still be eligible with a higher 5%-10% down payment.
How Do FHA Loans Work?
The Federal Housing Administration or FHA does not actually lend the prospective borrower the amount needed to take on a mortgage to buy a house. On the contrary, the borrower in effect pays either a monthly or an annual mortgage insurance premium (depending on a predefined agreement) to the FHA to basically insure the loan which the financial institution subsequently issues to him or her. This is a win-win situation for both parties since in case of default, the lending institution’s overall financial risk is effectively minimized as a result of the fact that the FHA will be obligated to step in, so as to cover all the payments.
Conditions For FHA Loans
There are certain conditions attached to FHA loans, and some of them include the following:
- All applicants should be able to a (reasonably) steady employment history or should have worked for the same employer for a minimum duration of 24 months preceding the application. Recent college grads who apply for a loan are normally exempt from this.
- All applicants should have a valid Social Security number (SSN), as well as lawful residency in the United States of America and should also be of minimum legal age (as per the laws of their state of residence) to sign a mortgage
- These FHA loans are only available for the purpose of primary residence occupancy only
- All applicants’ front-end debt ratio i.e. the total mortgage payment, homeowners’ insurance plus HOA fees, mortgage insurance and property taxes and other payables should normally be less than 31 percent of their total gross income
- Applicants’ back-end debt ratio (this includes the total mortgage plus all of the prospective borrower’s monthly debt such as student loans, credit card payment, car payment, etc.) should be an amount less than 43 percent of their total gross income. There can be exceptions to this rule for applicants with high credit scores, strong savings, or larger down payment
- Typically, applicants should be at least 24 months out of bankruptcy and furthermore, should have re-established their sound credit rating. All exceptions are subjected to prior approval only
- In case of prior foreclosure, it is imperative that the borrowers must be at least 36 months out of the aforementioned foreclosure and should moreover have re-established their good credit
- It is imperative that the property (that is being considered for purchase) should meet certain minimum standards at the time of appraisal
FHA loans remain one of the most popular mortgage choices for home buyers nationwide. The program offers secure fix rate terms, generous loan limits, low down payment and flexible credit requirements. These are all good things that help “open the door” to homeownership.
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