One of the major hurdles a first-time homebuyer must successfully navigate is obtaining a home loan. Those who have some type of credit blip or no real credit history at all often face real challenges in qualifying for a mortgage with acceptable repayment terms. Although not limited to this type of buying situation, the FHA home loan can often be a great choice for first-time home buyers who would otherwise struggle to obtain a conventional mortgage.
Where can first-time borrowers go to apply for an FHA home loan?
Applying for an FHA home loan is relatively simple. Because these home loans are guaranteed through the Federal Housing Administration (FHA), they are readily available through most banks, credit unions, and mortgage lenders. Buyers can usually obtain a list of FHA home loan providers in their immediate area through their real estate professional.
What documentation is required during the application process?
Like most home loan application processes, prospective FHA borrowers will be required to provide several documents. These include:
- proof of employment and income, including the two most recent pay stubs
- bank statements for the two months immediately preceding the application
- proof of identity and residency, including driver’s licenses, Social Security cards, copies of divorce papers, green cards, and work permits
- credit reports, or copies of receipts to prove an adequate credit history, if insufficient credit reporting is available
Prospective buyers may also be asked for additional documentation during the initial application or later during the loan process in order to meet underwriting requirements or address any issue that may arise.
Will a credit issue prevent a borrower from qualifying for an FHA home loan?
FHA home loans are a good choice for first-time home buyers because it is possible for buyers to qualify for them under less stringent guidelines than those used for many other home loans, including most conventional loans. In fact, buyers who have some late pays, collection activity, or other blemishes on their credit report can be accepted in many cases. However, more serious issues, such as defaults on student loans or federal tax liens are not acceptable under the FHA home loan program.
Current FHA regulations require a credit score of just 620, with a small down payment of three percent of the home’s purchase price, as opposed to stricter conventional loans that require scores of 720 or higher for approval. In some cases, an FHA home loan may be approved for lower credit scores, if a larger down payment is made.
Will it be possible to use financial gifts for the down payment or closing costs?
Under FHA home loan guidelines, monetary gifts are acceptable for use toward the down payment and closing costs of the loan, as long as the gift meets certain requirements. For instance, it must be a true gift with no repayment agreement from a close relative or other approved source. In addition, the money must be correctly sourced and seasoned, in order to be accepted for this purpose.
First-time homebuyers who want to learn more about the FHA home loan process and what it can mean for their situation should start by discussing it with a trusted real estate professional, well before opting to start their home search. Their agent can provide them with helpful information about home types and conditions that are accepted under FHA home loan guidelines, as well as helping them locate a local lender who can walk them through the application and qualification process for the loan.