4 Things to Know Before Taking Out An FHA Loan Nevada

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The Federal Housing Administration (FHA) is part of the United States’ Department of Housing and Urban Development. It was created in 1934 by Congress and became part of the aforementioned department in 1965. Its main objective at the time of its founding was to make homeownership more affordable, given the fact that there was a rising number of mortgage defaulters. (1) This agency currently provides mortgage insurance on loans offered by private lenders.

So, what exactly is an FHA loan? What impact does it have on your homeownership dreams? This article aims to cover everything you need to know before applying for an FHA loan.

What is an FHA loan?

An FHA loan is a mortgage insured by the FHA. Due to this insurance, private lenders are able to reduce their requirements since they’re protected against any loan-related risks. For instance, in case a borrower defaults on their loan, the lender will still have the FHA insurance to fall back on.

Moreover, this type of loan is quite popular among prospective homeowners who are joining the market for the first time and are facing credit challenges or don’t have enough savings in their bank. As a home buyer, you’ll only need to put down 3.5% of the purchase price as a down payment. In addition, a credit score of 580 qualifies you for the loan.

Things to know before taking an FHA loan

You can use an FHA loan to buy a house for your family, refinance properties, or purchase manufactured homes. It’s worth noting, though, that this loan can only be offered by FHA-approved lenders. So, it’s imperative that you do your due diligence before committing to any deal. In addition to that, here are other important things you should know about FHA loans:

1. Different types of FHA loans

One of the most important things you’ll need to understand is there are different types of FHA-insured loans. The most common is the traditional mortgage program, which allows prospective homeowners to purchase a house even if they don’t have the required amount or don’t meet the credit score limits at the time. (1)

Home Equity Conversion Mortgage (HECM) is another FHA loan and is offered to seniors older than 62 years. It’s basically a reverse mortgage whereby the homeowner is allowed to convert their house’s equity to cash. All the while, the homeowner is free to keep the title while withdrawing cash.

FHA 203(k) improvement loan, on the other hand, factors the cost of repairs and other expenses into the loan. You can borrow a given amount for home improvement and other purchases. Other loans include FHA energy efficient mortgage and Section 245(a) loan.

Understanding all these types of loans will make it easier for you to choose the right one that fits your needs.

2. FHA loan limits

Regardless of the type of FHA loan you’re looking to take out, there’s always a maximum amount for which you can qualify. FHA loan limits Nevada range between $USD420,680 and $USD1,094,700. The limit can vary with year and other relevant factors.

It’s worth noting that $USD420,680 is the limit for a one-family home in most counties of Nevada. $USD1,094,700, on the other hand, is the highest limit for a four-family home in the region. Since housing prices in some counties fall in between these ranges, it’s imperative that you confirm the correct and up-to-date value for your county. (2)

Given all these complexities and differences in loan limits based on counties, it’s always recommended that you take note of the maximum mortgage value you can receive in your area. Additionally, you might be wondering who sets these loan limits and why they keep changing every year.

3. Debt-to-income ratio

Like any other loan, you’ll need to meet certain requirements for you to qualify for an FHA-insured loan. The main factors considered, as earlier mentioned, include your credit score and the ability to satisfy a down payment of 3.5% of the total purchase price. This value could rise to 10% of your credit score is lower than 580. (3)

Apart from these major factors, the debt-to-income ratio (DTI ratio) is another thing considered during the loan application process. It’s important to note that for you to qualify for an FHA loan, your DTI should be at most 50. In other words, the amount deducted to repay your debt monthly should be less than 50% of your income.

Remember, all debts including those that you’re not servicing at the moment are included in this calculation. In such a case, 1% and 5% of the total amount of student and other loan types respectively will be included in the monthly computation of DTI.

4. Property approval

It’s also worth noting that not all properties can be financed using an FHA loan. Whether it’s a single-family, multi-family house, or manufactured home, it’ll still need to meet the minimum property requirements set by the Federal Housing Administration.

For one, the agency will need to be sure that whatever you’re purchasing is worth investment. This means they’ll need to do a thorough assessment beyond the normal inspection before approving the loan. The building should meet all the basic safety standards and it also needs to be livable.

If you’re applying for an FHA 203(k) renovation loan, for instance, you might be required to have your property appraised by the FHA at least twice. The initial appraisal will be done before the repairs are done, while the second one will come after renovations. As such, the agency will be able to estimate the new property value after all the repairs have been done.

Conclusion

FHA loans are insured by the Federal Housing Administration to make sure that even those who don’t have enough cash in their banks can purchase the house of their dreams. Every state and county has a given limit for single-family, multi-family, and other property-related FHA-insured loans. Regardless of the home loan type you choose to take, it’s imperative that you understand all the requirements and whether your lender is FHA-approved before starting the application process. Also, make sure you re-read the factors covered in this article to avoid any frustrations in the future.

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