The FHA, Federal Housing Authority, insures loans made by private lenders. Historically, the FHA has helped lower-income Americans to purchase homes and FHA loans can be a great option for first-time home buyers. The FHA provides a lower down payment and more flexibility in terms of income requirements than other lending options. FHA loan applicants are less likely to be denied based on falling short of specific criteria; instead, the process looks at the wider picture of an applicant’s situation. That said, not everyone is approved by the FHA for a loan and there is still a process that must be adhered to.
The FHA does look at credit scores and income. Not having a credit score is not a problem and having a low credit score is not an issue in itself. The reasons for having a low score, however, can disqualify an applicant; for example, not paying bills on time does not bode well for an applicant’s ability to pay a mortgage. The FHA also looks at employment and employment history. The majority of FHA approved lenders prefer to see at least two years of solid income at the same job and for this income to continue at least three years into the mortgage. Part-time employment generally does not count, unless it has been extremely steady (for example, you have worked 25 hours a week for the past two years and plan on continuing this level of work) and contract work can also lead to disqualification, depending on the contract stipulations.
The FHA loan must be used only for a person’s primary residence. Applications for rental or investment properties will be automatically disqualified and properties that need a lot of work (a.k.a. fixer-uppers) are usually not approved. Due to the low down-payment (of 3%), the FHA requires mortgage insurance to be taken out at the time the loan is given. The insurance is generally added directly into the cost of the mortgage, so the buyer does not have to pay a separate bill, and runs about 1.5% of the loan.
To get started, contact several lenders to see if they are FHA-approved. If they are, they will likely be willing to help you along in the process.