FHA Loan Tips and Resources

Learn everything you will need to know to get the best FHA loan below.

FHA loans are mortgages that are granted by the Federal Housing Administration (FHA) to purchase or refinance one to four unit owner-occupied residential properties, condominiums, and manufactured homes. These loans are not actually funded by the FHA, but are instead a guarantee that the loan will be repaid in case the borrower defaults. The program is managed by the U.S. Department of Housing and Urban Development (HUD). Unlike most traditional loans, FHA continues to thrive in the housing market even in these hard economic times.

FHA requirements are generally flexible and lenders may look into compensating factors for borrowers who have less than perfect credit scores and/or past credit issues. In general, borrowers must have stable income and employment history to qualify for the loan amount, proof of U.S citizenship, minimum down payment as well as purchasing a property for primary use – investment homes are generally not allowed.

FHA loans are also extremely popular among first-time home buyers. After the economic crisis, and the meltdown of the mortgage market, it has become even more difficult for first-time home buyers to qualify for a mortgage. Even so, FHA loans are still much easier loans to secure than regular conventional mortgages.  As long as you don’t have another mortgage already and you meet the requirements, you should be able to get approved for an FHA loan with ease.

Aside from the typical first-time home buyers, someone needing to refinance a mortgage can benefit from FHA loans as well. Current guideline changes permit for a cash out refinance of up to 85% of the appraised value of the home. With all of the recent decrease in values of properties, it’s probably worth it to refinance a mortgage in order to decrease the value of your interest rates without getting funds back.

FHA allows for up to 95% of appraised value. This deal has the same credit score requirement of 620 with most banks funding FHA loans. If a refinancing homeowner already has an FHA loan on the property, he or she can do an FHA Streamline loan. This loan does not require a reappraisal of the property or pre-qualifying for the loan if he proves that he has had a clean payment history.

Below you will find all the important details you will need to know in order to get educated about this government sponsored loan program whether you are a home buyer looking for a great mortgage, or a current homeowner searching for a loan to refinance.

Who benefits from FHA loans?

-First-time home buyers

-Young families

-People just coming out of renting for years

-Those who have just recovered from a long term credit munchers like foreclosures and bankruptcies

-People with lower credit

-Someone who needs to refinance

Types of FHA Loans Available

-30 year fixed rate

-15 year fixed rate

-A few adjustable rate programs are available

-203k purchase loan- used for renovation of the property that’s being bought

-100% FHA Loan For Building Rural Areas

Guarantees from HUD

Credit

This type of loan is one of the more lenient mortgages when it comes to credit as they can be very understanding of certain financial situations. FHA requirements are generally flexible and lenders may look into compensating factors for borrowers who have less than perfect credit scores and/or past credit issues. In general, borrowers must have stable income and employment history to qualify for the loan amount, proof of U.S citizenship, minimum down payment as well as purchasing a property for primary use – investment homes are generally not allowed.

Credit requirements to obtain an FHA mortgage will of course differ from area to area, and the individual lender will carry their own rules as well. Because this loan type does not put as much emphasis on your debt history as conventional loans do for the sake of the individual buyer, borrowers will have a lot more freedom to qualify with a credit score that ranges from 580 to 620, but they will go as low as a 500 credit score.

When putting down a minimum of 3.5%, your credit score needs to be at least 620. FHA guidelines however dictate that credit scores that are 579 and below will be subject to a limited to 90% loan-to-value ratio (LTV). Besides the fact that applicants with lower credit scores have to put more down, the minimum credit scores that FHA programs require is definitely a generous offer to consumers. This definitely beats other conventional loans that require a minimum credit score of 720 or higher for prime rates.

FHA has even allowed consumers who have suffered from a foreclosure, bankruptcy or short sale due to economic reasons that affected their household income, to qualify for another FHA loan within 1 to two year through FHA’s Back to Work Program. If you can prove that your loss of your home or credit was caused by a 20% income reduction in the last six months before you lost your home; that you have financially recovered since your financial hardship/loss of your home; that you maintained a decent credit score when your economic hardship took place, and that you have completed a minimum of one hour of one-on-one housing counseling from a HUD-approved housing counseling agency.

However,  if you had any federal liens, like tax liens or defaults on student loans, then you will not be eligible for an FHA loan.

You can find our more about the Back to Work Program at this link.

Down Payment

Low down payments are one of the primary attractions for FHA loan programs. Many conventional loan programs will require down payments of at least 10%. FHA allows down payments that can be lower than 3.5%, depending on the other variables such as your credit score which I mentioned above. They also allows homebuyer to pay down payments with money that was borrowed or received as a gift, relative, friend, employer, charitable organization or government agency.

Other closing costs can vary from 1% to 4% of the loan cost. Typical fees will include, but are not limited to mortgage origination, Deposit verification, Attorney services, home appraisal, title insurance and examination, document preparation, property survey and credit report fee.

Rates

FHA loan rates are very competitive rates and this will equate to lower payments every month when you pay your mortgage payments. With lower interest rates, you will pay less over the life of the mortgage. This type of loan offers very close, if not the same rates as a traditional 30-year fixed loan.

Application Process

The FHA mortgage is without a doubt the most lenient when it comes to who they will lend to. As long as credit requirements have been met, 3.5% down payment, and steady employment, you most likely will not be denied. The FHA applications can be a much easier process than traditional conventional loans.

Debt to Income

The FHA allows a high debt-to-income ratio. In general, they will usually require that your ratio be at least 29/41 and as high as 50 on the back end. As long as you believe you can afford the payment, the FHA may allow a 50 percent debt-to-income ratio. This is determined by adding up all of your debt, including your proposed new mortgage payment, and dividing it by your monthly income to receive a percentage.

If you have a loan on a car, student loans, or credit cards, you may still be able to qualify. Maybe you’re in a situation where you know you’re going to get a raise later in the year, but you want to apply for the loan now. Perhaps you know that your car loan will be paid off in about 6 months.

Property Requirements

FHA has certain minimum property requirements and standards a property must have in order for them to insure the loan. Although FHA is more lenient than other mortgage insurers, any property that is going to be funded must meet minimum construction guidelines to ensure the soundness and safety of the property. These include the repair of any defective work on the house, poor quality work, leakage, decay caused by termites or any other condition that impairs its safety, sanitation or structural soundness.

For example, the home cannot be in major need of repair and have structural damage. It must have the electrical, gas, water and all appliances on the premises to be in working order. Sufficient space for living, sleeping and specific areas for cooking and dining must be available, as well as sanitary facilities such as  bathrooms (not limited to) with functioning showers/tubs. Any excessive pollution, radioactive materials, mudflows or other hazards must be dealt with before FHA financing can take place.

If there are any items that are considered health and safety hazards in and around the home, then this will be cause for a denial. In other words, the property needs to be in livable condition by meeting the basic level of sanitary and safe living with all its appliances in working order and no potential safety hazards. These minimum property standards can be viewed at HUD.

Loan Amounts

There is a maximum loan limit that will vary by location. In certain (low cost) areas the FHA will only insure loans up to $272,500, while in high cost areas such as Los Angeles or New York City, the loan limit may be substantially higher, up to $729,750. Before considering an FHA loan, it’s wise to first check the FHA loan limit in your area to ensure this type of financing fits your needs.

Private mortgage insurance (PMI)

All FHA lenders will charge a borrower for PMI, unless they pay a full 20% down payment when buying a home. The luxury of being able to buy a home with less cash upfront, makes being stuck with PMI even more easy. Lenders will require both upfront mortgage insurance premium (UFMIP) and annual premiums. The UPMIP is currently at 1.75% of the base loan amount. This applies regardless of the amortization term or LTV ratio.

As of April 1, 2013, if the homeowner obtained the loan with an original LTV of 90% or less, the FHA will cancel the annual insurance premium after eleven years. For borrowers with less than a 10% down payment, including the well-known 3.5% down payment program, the FHA will collect the annual premium for the life of the loan. On the other hand, for loans closed prior to this date, the annual premium costs may be eliminated once the borrower has paid mortgage insurance for five years – as well as an LTV of 78% or less than the purchase price or market value.

Now those are the basics with FHA loans. Below you will find the most common questions we get from consumers.

Can a relative help with the down payment?

Yes, gift funds are allowed for FHA loans. These funds may come from a relative, FHA-approved charity or a government agency. Gift funds cannot come from a source that has interest in the property, i.e. seller, builder or lender. The gift funds must also be accompanied with an FHA gift letter, showing proof that the funds belong to the donor.

Will the FHA insure manufactured or multi-unit properties?

Yes, the FHA generally insures all property types, assuming the property is purchased as a primary residence. Prospective homebuyers can use FHA financing for single-family homes, town homes, condominiums, manufactured homes in addition to multi-unit properties (up to 4). For multi-unit properties, the borrower must plan to reside in one of the units. Condominiums as well as town homes listed as “condominiums” will need to be FHA-approved.

Do FHA loans come with fixed or adjustable interest rates?

FHA loans have a variety of programs to choose from, including fixed and adjustable-rate options. The more common FHA ARMs include 5- and 7-year terms. This means that the initial interest rate will be fixed for five to seven years, then will adjust according to the margin and subject to a “rate cap.” 5-year ARMs typically don’t allow more than a 2% rate increase after the initial fixed period, 2% rate adjustment annually thereafter and never more than a 6% increase over the course of the loan.

 

There is more to buying your home then the monthly house payment. Why not ask for an FHA loan that will help you buy your house and keep it too? Tell your lender you want an FHA loan for all the reasons above- FHA is a wise choice.

Erik Sandstrom

Erik Sandstrom

Mortgage Expert

Hi, my name is Erik Sandstrom. I’m a proud sponsor and mortgage expert on LoanSafe.org. I’m also a sale’s manager and loan officer with Caliber Home Loans. If you are looking for a great mortgage with the best rates or for a great company to work for, please call me direct at 619-379-8999 or email me using the contact form below.

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