What is an FHA loan?
One of the most popular options home buyers have to finance their mortgage is the FHA home loan. FHA home loans are perfect for first-time home buyers and for borrowers who need a little more slack in borrower requirements.
With benefits like low requirements for a down payment and reasonable interest rates, FHA loans are a great home loan package for any budget! Find out below if an FHA loan is right for you.
Why you should consider an FHA Loan
FHA home loans are mortgages secured by the U.S. Government’s Department of Housing and Urban Development (HUD) division through the Federal Housing Administration (FHA). Originating in 1934, the FHA has backed over 34 million mortgages for home buyers in the United States!
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.
If a borrower defaults on the 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. This is great for home buyers!
Is an FHA Loan Right for You?
While particularly a great place to start for first-time home buyers, FHA loans are generally an amazing mortgage option. The low risk for lenders due to the government insurance of the loans allows for much higher flexibility in borrower requirements. Borrowers are allowed to have credit scores as low as 580 to qualify, and in some cases, even lower (if a higher down payment is made)! FHA loans are also known for their reasonable interest rates and amazing refinancing options.
Refinancing Your FHA Loan
Adding to the value of FHA home loans are the stellar refinancing opportunities! For homeowners looking to refinance through the FHA program, there are two great options to choose from. These refinancing packages are meant for FHA mortgages specifically, with benefits that are hard to find anywhere else:
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.
FHA Loan Cons
Might accrue more fees than other loans
Requires mortgage insurance premiums that increase the loan value
The loan amount is capped based on where you live; not all properties fall under the loan limit
FHA Loan Pros
Flexible borrower requirements
High number of FHA lenders available
Down payments as low as 3.5%
Credit scores as low as 500 accepted
Mortgage Insurance for FHA Loans
Although FHA loans provide a flexible option to borrowers with lower credit scores, they require a bit extra from these borrowers. For the FHA to secure the loan, mortgage insurance is required on all FHA loans. Mortgage insurance in this case is usually split into two mortgage insurance premiums (MIPs) that must be paid:
- First, there's an upfront mortgage insurance premium (UMIP) that consists of a one-time payment of 1.75% of the loan amount (regardless of the borrower's credit score). For example, a loan of $260,000 would require a UMIP of $4,550 ($260,000 x 1.75%). This amount can be paid in full at closing, or added to the loan amount to be paid off.
- The second of the two premiums is known as the annual mortgage insurance premium (AMIP). The AMIP is determined by a combination of the borrower's LTV ratio, the loan term, and the amount borrowed. This charge (a percentage of the loan amount) is billed monthly within the mortgage payment.
MIPs may not be popular among borrowers, but they're a pretty small price to pay to have such flexible eligibility standards!
FHA Loan Requirements
Home buyers 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 meet these standards:
Must be a lawful resident of the USA
Valid Social Security number is required
Must adhere to the state age requirement for signing a mortgage
Must have steady employment or a 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 minimum down payment of 10% must be made
Must be able to pay a minimum down payment of 3.5% (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 Loan Checklist
When applying for an FHA loan, borrowers should have the following information/documentation available to give to the lender:
- Address of current residence (past 2 years)
- Social Security card
- Employer information (past 2 years)
- Gross monthly income from current job(s)
- Pertinent banking (checking and savings accounts) information
- Up-to-date status on all open loans
- Approximate value of all assets
- Certificate of Eligibility and DD Form 214 (for U.S. veterans)
- W-2 forms (past 2 years)
- Pay stubs (past 2 years)
- Self-employed individuals must provide personal tax returns (past 2 years), current income statement, and business balance sheet