What is a Washington, DC FHA Loan?
A Washington, DC FHA loan is a type of mortgage which is in the District of Columbia and insured by the federal government. The Federal Housing Administration (FHA) agrees to insure FHA loans, which means that if the borrower defaults on the loan, the FHA will compensate the lender to mitigate their loss. Due to this insurance, the lender can offer better interest rates, lower credit requirements and lower down payments to the borrower. In addition to being lower, these down payments can also be paid as a gift by a friend or family member, which makes it ideal for first-time homeowners.
Below, we at Online Loans have broken down the assorted information available across the web into a convenient need-to-know to make getting you FHA loan as simple as possible. You can also check out our mortgage calculator to get a better idea of what a new home will end up costing you.
The credit score of the borrower determines the size of down payment for FHA loans. If the borrower's credit score is above 580, they may qualify for an FHA loan with a 3.5% down payment. If they have a FICO credit score that is below 580, they need to make a 10% down payment. Borrowers who have FICO credit scores below 500 are not meant to qualify for FHA loans, although sometimes there are exceptions made for those who have had good credit in the last two years. Independent lenders reserve the right to set their own credit requirements, which are often stricter. To qualify for an FHA loan, you need to have kept the same employment for the past two years. You also need to have a mortgage payment expense to income ratio of no more than 31%, which means you cannot spend more than 31% of your income on your monthly FHA loan payments. Additionally, you need a total fixed payment to income ratio of 43% or less; this means that the sum of all of your monthly debt obligations (home loans, car loans, student loans, etc.) cannot be more than 43% of your monthly income.
While there is variation due to individual lenders setting their own rates for FHA loans, they typically have notably lower interest rates than conventional loans. The lower rates are offset a bit by the fact that with FHA loans you need to pay a fee for additional insurance. This fee ranges between .45% and .85%. FHA loans always have fixed interest rates. When an interest rate is fixed, it means that it remains constant throughout the entire term of the loan and is not affected by variations in the prime interest rate. This provides more stability for the borrower. For a Washington DC FHA loan, a typical APR would be between 4.2% and 4.5%.
Rates are also affected by how strong your credit is. If you're worried about your credit and want some tips of improving it, you may want to check out our credit rebuilding guide.