What is an Iowa FHA Loan?
An Iowa FHA loan is a government-insured home loan in the state of Iowa. The loan is insured by either the US Department of Housing and Urban Development (HUD) or by the Federal Housing Administration (FHA); if a borrower defaults on an FHA loan HUD or the FHA will cover a portion of the amount owed to the lender. This reduces the risk for the lender which allows them to offer lower rates, lower credit requirements, and smaller down payments. The difference in the size of the down payments is the most notable; it can be up to 20% for conventional loans but is usually 3.5% for FHA loans. Also this down payment can be made as a gift from a friend or family member, which makes it an ideal loan for first-time homeowners (see our mortgage calculator for a better idea of the costs of your first home loan).
To obtain an FHA loan with a 3.5% down payment you need to have a credit score of at least 580. If your credit score happens to be below 580, then you must make a down payment of 10%. Borrowers with credit scores below 500 rarely qualify for FHA loans, although it can happen if your credit history is good for the last two years. While these are the FHA guidelines, individual lenders often set higher standards for their FHA loans.
If you want to qualify for an FHA loan, then you must have good debt-to-income ratios. This is measured in two different ways. One is the percentage of your monthly income that goes into paying all of your different debt obligations (mortgage, car loan, student loans), its called your total fixed payment to income ratio, and it needs to be less than 43%. The other way they measure debt to income is the percentage of your income that would need to be going to repaying the loan, its called mortgage payment expense to income ratio, and it needs to be under 31%.
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There are some addition restrictions on FHA loans. They can only be used on your primary residence. You cannot purchase a building with an FHA loan for the sole purpose of renting apartments. You also need to have a good employment history, maintaining the same job for at least the last two years. Finally you need to be a legal US resident.
Maximum limits vary between the location and the type of housing. In Iowa, maximum limits are the same in every county, and they range from $294,515 for a single-unit house and $566,425 for a four-unit home.
FHA loans, in general, tend to have lower interest rates than conventional home loans, since FHA loans are insured by the federal government. These lower rates are slightly offset by the demand to pay an annual fee for additional insurance; this fee ranges from .45% to .85%. FHA loans always have fixed rates. This means that once a payment plan is agreed upon interest rates remain constant, independent from any sort of market fluctuation. This helps make payments more stable from the borrower.
Longer loans tend to have slightly higher APRs because the borrower gets to be locked in at that rate for a longer period. Smaller loans tend to have higher APRs because the underwriting costs are the same independent of the size of the loan, so they represent a higher percentage of a smaller loan.