First time home buyers approaching the purchase of a home can find the process overwhelming. This potential complexity is increased when the prospect of securing an FHA or Federal Housing Administration loan product is part of the overall process of buying a new home. This is mainly due to the regulations that surround gaining such a loan product. However, understanding the guidelines to gain a FHA backed loan can help mitigate the complexity involved and make the first time buyer better prepared.

Understanding an FHA Loan

While it is called an FHA Loan, the Federal Housing Administration does not in actuality, loan money. The Federal Housing Administration provides backing or insurance on a financial loan from an approved financial provider/lender. The purpose of this loan property is to provide funding for homes that would otherwise be outside of the financial range of the borrower using a non backed loan. This is an excellent way for a first time buyer to get into a new home. In order to take advantage of this type of opportunity, the first time buyer must fall within the guidelines that govern approval of such a financial product.

Credit Score

To qualify for a FHA loan, the buyer must have a credit score no less than 500. However, there are some circumstances in which individuals with less than 500 points may still qualify. Such situations are usually limited to non traditional credit histories or an insufficient credit history. Those buyers who have a higher than 500 score are not automatically qualified but the higher the score helps with lowering the down payment. The minimum required down payment is 3.5 percent of the price of the home.

Debt Ratio

One of the significant determining factors or guideline for an FHA backed loan is the debt ratio of the purchaser. There are two ratios that the future buyer must fall under. The first is the Mortgage Payment to Effective Income Ratio. To find this ratio; take the monthly house payment and divide by all the applicants income. This gives a percentage amount. The maximum ratio to qualify at this level is 31 percent. The next ratio to consider is the Total Payment to Income Ratio. This is all the debt of the applicants compared with the current gross income with the mortgage payments and other debt factored in. The maximum qualification ratio for this level is 43 percent.

At first, the combination of the credit score with the debt ratio might seem confusing. This is why it is critical to obtain the services of a mortgage professional to help navigate the complexity and uncertainty involved in securing a home loan. To qualify for an FHA backed loan product, the mortgage professional must be an approved FHA lender.  While there are many available it is best to consult a full service real estate company who has the experience and knowledge to help a buyer through the challenging process of purchasing a home or property. Gaining an FHA mortgage loan is a great way to purchase a new home and getting the right mortgage professional can help making gaining that loan a certainty.