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. FHA’s 203(b) mortgage insurance program is the FHA’s most popular loan product for single-family home buyers.
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
Qualifying for an FHA loan is one of the easiest ways to be approved for a mortgage. They require low down payments, and your credit score can be less than stellar. In fact, borrowers with credit scores as low as 500 can qualify for FHA mortgage loans.
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.
Competitive Interest Rates. FHA loans offer low interest rates to help homeowners afford their monthly housing payments. This is a great benefit when compared to the negative features of subprime mortgages.
Bankruptcy / Foreclosure. Having a bankruptcy or foreclosure in the past few years doesn't mean you can't qualify for an FHA loan. Re-establishing good credit and a solid payment history can help satisfy FHA requirements.
Determining Credit History. There are many ways a lender can assess your credit history, and it includes more than just looking at your credit card activity. Any type of payment such as utility bills, rent, student loans, etc. should all reflect a general pattern of reliability.
It’s an Assumable Mortgage. This means if you want to sell your home, the buyer can “assume” the loan you have.
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)
Additional FHA Loan Requirements
The FHA’s mortgage options offer opportunities to those who are first-time home buyers, as well as those with low income or low credit score. There are many requirements to qualify for a Federal Housing Administration (FHA) loan.
First, to be an FHA borrower, you must be of legal age in the state where you’re applying for a mortgage. You also need a valid Social Security Number, and you must be a legal US resident. You must have at least two years of steady employment history, and it’s best if you’ve worked for the same employer during that time. The FHA requires that a borrower’s front-end ratio is less than 31 percent of total income. Your front-end ratio includes your monthly mortgage payment, HOA fees, homeowners insurance, property taxes, and mortgage insurance.
Additionally, the borrower’s back-end ratio should be less than 43% of total gross income (although it’s possible to be approved with a ratio up to 50%). Your back-end ratio includes your monthly mortgage payment and all your other bills.
For the self-employed, those borrowers need two years of self-employment history. This can be documented with tax returns, and a year-to-date balance sheet along with profit and loss statement. If you’re newly self employed (less than 2 years), you can still be eligible if you have a steady work and income history for the two years prior. Your self-employment career should be in the same or a related occupation as your previous job.
Bankruptcy and foreclosure don’t automatically disqualify a borrower for a FHA 245 loan. If it’s been two years since the bankruptcy—or if you can prove it was an uncontrollable circumstance, you can still qualify. If you’re at least 3 years from a foreclosure and can demonstrate you’re working to repair your credit, you can still qualify.
The property you finance with an FHA mortgage has to be your primary residence, which means you have to live there. You can’t finance investment or rental properties with an FHA loan, but detached and semi-detached houses, condos, townhouses, row houses, and FHA-approved condo projects all qualify for FHA financing.
Finally, the lender must be approved by the FHA. The FHA isn’t a lender, they are an insurer—the borrower receives funds from an FHA-approved lender, and the FHA guarantees the mortgage loan.
FHA Loan Limits
The Federal Housing Authority sets maximum mortgage limits for FHA loans that vary by state and county. In certain counties, you may be able to get financing for a loan size up to $729,750 with a 3.5 percent down payment. Conventional financing for loans that can be bought by Fannie Mae or Freddie Mac are currently at $625,000.
Mortgage Insurance is Required for an FHA Loan
You knew there had to be a catch, and here it is: Because an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront -– or, it can be financed into the mortgage –- and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.
Upfront mortgage insurance premium (UFMIP) — Appropriately named, this is a one-time upfront monthly premium payment, which means borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.75% = $5,250. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage.
Annual MIP (charged monthly) — Called an annual premium, this is actually a monthly charge that will be figured into your mortgage payment. The amount of the mortgage insurance premium is a percentage of the loan amount, based on the borrower’s loan-to-value (LTV) ratio, loan size, and length of loan
How Do You Get an FHA loan?
A lender must be approved by the Federal Housing Authority in order to help you get an FHA loan. You find FHA lenders and shop for mortgage quotes for an FHA loan quickly and easily through home.loans. Just submit a loan request and you will receive custom quotes instantly from a marketplace filled with hundreds of lenders. The process is free, easy and you can do it anonymously, without providing too much personal information. If you see a lender’s loan quote that you are interested, you can contact the lender directly.
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.