Mortgages that are insured by the Federal Housing Administration, otherwise known as FHA Loans, are popular options for first- and second-time home buyers. FHA loans are relatively easy to qualify for, will buy enough house to get you going, and are designed to help you succeed. Originating in 1934, the FHA has backed over 34 million mortgages for home buyers in the United States! Offering down payments as low as 3.5% and low credit requirements have made these loans an amazing option for any prospective home buyer. Having the loan backed by the government lets lenders be more flexible with their eligibility requirements.
Should a borrower default on repayment of the loan, the FHA reimburses the lender for its loss. With less risk, lenders have more reason to offer FHA loans at competitive rates, which is great for home buyers! There’s a lot more about FHA secured loans below, but if you want the cliff-notes version, contact us at Home.Loans and we’ll explain it all without all that reading.
FHA Mortgage Basics
The FHA mortgage program is one of the best tools first time home buyers can use to get into their home when they’re relatively cash poor and have little credit experience. Credit’s funny that way, you need something big like a mortgage in order to be trusted with something big like a mortgage -- The FHA gives you a chance to show the world what you can do when you work that credit file.
Offering down payments as low as 3.5% and low credit requirements for eligibility have made these loans an amazing option for any prospective home buyer. As if that wasn't awesome enough, having the loan backed by the government lets lenders be more flexible with their eligibility requirements. Should a borrower default on repayment of the loan, the FHA reimburses the lender for its loss. With less risk, lenders have more reason to offer FHA loans at competitive rates, which is great for home buyers!
Most reputable banks will offer FHA products, though some will be more enthusiastic than others. FHA tightly regulates what kinds of closing costs you can be charged, as well as limiting their amounts. However, if you bring a down payment smaller than 20 percent of the purchase price of your home to the table, you’ll be responsible for paying for mortgage insurance, so there are trade-offs.
Pros and Cons of FHA Mortgages
FHA mortgages are generally pretty good options, but they’re not for every home or every home buyer. Just a few things to think about:
Benefits of an FHA Mortgage
- Low downpayment requirement. You can borrow from FHA with as little as 3.5 percent of the purchase price as a downpayment. You’ll see benefits for bringing 10 percent, but more than that is just showing off.
- Controlled closing costs. FHA tightly regulates what closing costs can appear on your closing statement and how much they can be. This has deterred some lenders from using them, but overall, FHA loans are very easy to find.
- Easier qualifying. As far as mortgages go, FHA is extremely forgiving. Depending on what else you bring to the table, a borrower with a credit score as low as 500 may be able to secure a loan. The program is also generous when it comes to debt-to-income ratios.
Drawbacks of an FHA Mortgage
- Potential lifetime mortgage insurance. Since June 2013, FHA’s mortgage insurance premium (MIP) has been a lifetime sentence for anyone with less than 10 percent down. That can be a big chunk of extra payment for no benefit, forcing you to refinance down the line..
- Additional inspections required. Anyone who has sold to an FHA buyer and had problems can tell you that they’re not always easy. Not only do you have your home inspector go through the house, FHA sends an appraiser who performs an FHA inspection. It’s meant to ensure the house meets FHA’s minimum requirements, but can create a last minute logjam..
- Can be slow to close. FHA requires additional paperwork and in-the-field inspections to ensure their gamble is one that’s likely to end in long-term homeownership. Foreclosure is a dirty word at FHA, so these loans take a bit longer to close due to the additional checks and balances.
Who’s the Ideal Borrower for the FHA Loan?
FHA mortgages in all their glory (construction, energy efficiency, purchase-and-improvement and simple purchase loans, among others) are, in many ways, the perfect loan for a first time home buyer or a home buyer who is starting again after a serious financial trauma like a divorce or foreclosure. That buyer might be:
Ready to get into the market, but has little free cash.
Rebuilding their credit after a major incident.
Looking to lay a foundation for a young family.
Experiencing a temporarily high debt to income ratio.
Many different buyers can do a lot with an FHA loan, provided they’re prepared to let the loan take the time it takes and eventually refinance or resell the home to get out of the MIP trap FHA has established for buyers with very low down payments. There are lots of reasons to go with an FHA loan, including using them as a litmus test against unscrupulous lenders.
FHA Loan Requirements:
Homebuyers looking to secure an FHA loan must first meet a few standard eligibility requirements. While not as strict as most conventional loans, FHA loans require borrowers to conform to these standards:
- Must be a lawful resident of the USA
- Valid Social Security Number is required
- Must adhere to state age requirement for signing a mortgage
- Must have steady employment or source of income for at least two years
- Must have a credit score of at least 580
- Borrowers with credit scores between 500 and 579 are still eligible, but a down payment of no less than 10% must be made
- Must be able to pay a down payment of 3.5% minimum (unless more is required as stated above)
- Must have a debt-to-income ratio of less than 45% (actual amount varies by lender)
- Must have a clean Credit Alert Verification Reporting System (CAIVRS) report showing no current delinquencies
- Must intend to use loan proceeds toward a primary residence
- Property must be appraised by an FHA-approved appraiser
- Property must meet minimum standards
- Must be 2 years out of bankruptcy (if applicable)
- Must be 3 years out of foreclosure (if applicable)
FHA Loans: In Review
In the short term, you really can’t go wrong with an FHA loan. The low downpayment requirement is one of its most attractive features, especially for young buyers who have decent jobs, but are still painfully cash-poor. Since it’s likely that you’ll sell before you reach the point where your MIP would have actually been removed in the past (in about 11 years), it might not actually matter that you’ve been tagged with MIP for life.
It does sound pretty terrifying, though.
But don’t worry, we’ve got your back. Contact Home.Loans with your burning FHA loans questions, we’re here to help and it won’t cost you a plug nickel. It’ll be the best free thing you’ve gotten all day.
FHA Streamline Refinancing
A no-hassle way to refinance your FHA home loan. Benefits include no credit check, no income verification, and no need for FHA home appraisal. Refinancing simplified!
FHA Cash-out Refinancing
Turn your home equity into cash with this FHA-secured cash-out refinancing option. Follows the flexible requirements of standard FHA loans for borrowers with lower credit scores.