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A Guide to FHA Loans

An FHA mortgage is a type of government-backed mortgage loan that can allow you to buy or refinance a home, often times, with looser financial requirements. These loans are offered by mortgage lenders, banks, credit unions and insured by the Federal Housing Administration.

 

Borrowers who want to finance a home but don’t qualify for a conventional mortgage due to less than perfect credit or insufficient income, may find that an FHA loan is a more appropriate option for them.

 

Here, we’ll take a closer look at FHA home loans, their requirements and whether an FHA loan might be right for you.

What is an FHA loan?

FHA loans are backed by the Federal Housing Administration, an agency under the jurisdiction of the Department of Housing and Urban Development (HUD). FHA loans are insured by the FHA, which simply means that this organization protects your lender against loss if you default on your loan.

The biggest advantages with FHA loans is that they are available as a low down payment option, and with lower minimum credit score limits. Also, FHA offers looser guidelines regarding credit and credit history, for instance, if you have had a negative credit event such as a bankruptcy, a short sale or a foreclosure, FHA may still be able to help you get financing.

FHA loan requirements

There are certain requirements borrowers must meet to qualify for an FHA loan, including:

  • You can only get a new FHA loan if the home you consider will be your primary residence, which means that it can’t be an investment property or a second home.
  • The home must be appraised by an FHA-approved appraiser
  • For new purchases, you must occupy the property within 60 days of closing.
  • 580 minimum credit score
  • 3.5% minimum down payment
  • Maximum 47/57% debt to income ratios

FHA loan down payment requirement

Your down payment is a percentage of the purchase price of a home, and is an investment that you make into the equity of the property. For most FHA home buyers, the minimum down payment required is 3.5%, however, if a borrower wishes to put more money down, they can do so. On certain occasions, buyers with credit scores between 500-579 may qualify for an FHA loan if they can make a 10% down payment.

FHA allows the borrower to have a down payment in the form of a gift by an immediate family member, or with the help of an organization or even through down payment assistance and grants.

Something you need to know – The FHA Mortgage Insurance

Mortgage insurance refers to a premium mandated by the FHA to protect the lender in case of a borrower default. In FHA loans, this mortgage insurance is a one-time cost of 1.75% of the base loan, which can be rolled into the loan and a monthly mortgage insurance premium.

In most cases, you pay mortgage insurance for the life of an FHA loan (unless you made a down payment of at least 10%, in which case, MIP would be on the loan for 11 years). 

The FHA Mortgage insurance can be costly and compared to a conventional mortgage, it can be higher which in turn, produces a higher monthly payment for a borrower. This is one of the biggest disadvantages regarding FHA loans.

FHA loan limits

There’s a limit to how much you can borrow under an FHA loan, and the amount you qualify for is determined by the county where your desired property is located.

According to the Department of Housing and Urban Development, the maximum FHA lending amount for high-cost areas (Los Angeles, Hawaii, San Francisco, New York, DC, etc) is up to $822,375 for 2021. However, in most parts of the country, the maximum FHA loan amount is $412,850.00

You can look up the FHA mortgage limits for one or more areas on the FHA mortgage limits page.

Types of FHA Loans

FHA offers multiple financing options but in this article, we will look into the most popular ones in the market.

Buying a home with an FHA loan

As mentioned before, FHA is a great option for first time home buyers and buyers who may not meet the qualifications required for a conventional mortgage. Buyers may qualify with a little as 3.5% down with a FICO at 580 or more.

With an FHA loan, you may purchase 1-4 unit properties, townhomes and condos so as long as the project is FHA approved.

FHA loan refinances

FHA Rate/Term Refinance

If you are homeowner wanting to take advantage of today’s low interest rates, to either lower the monthly payment or term of your mortgage, looking into an FHA rate/term refinance may be a smart move.

Do note that FHA Rate/Term refinances require an appraisal on the property and the more amount of equity you have, the better. This may translate into a lower rate, mortgage insurance premiums, and more.

FHA Streamline

An FHA Streamline allows current homeowners with existing FHA loans to do a rate/term refinance without the need of an appraisal, income requirements and even credit score requirements.

In the eyes of HUD, if you have a more affordable payment than what you currently have, odds are, you will most likely continue to pay on time without the fear of default. You may also be able to get a lower mortgage insurance rate as the MIP for FHA Streamlines is 0.55% of your overall loan amount annually.

Although it seems like FHA streamlines are an unbeatable deal, sometimes, they are not. We encourage you on checking all your options available before determining if a streamline is the right thing for you.

FHA cash out refinance

An FHA Streamline allows current homeowners with existing FHA loans to do a rate/term refinance without the need of an appraisal, income requirements and even credit score requirements.

In the eyes of HUD, if you have a more affordable payment than what you currently have, odds are, you will most likely continue to pay on time without the fear of default. You may also be able to get a lower mortgage insurance rate as the MIP for FHA Streamlines is 0.55% of your overall loan amount annually.

Although it seems like FHA streamlines are an unbeatable deal, sometimes, they are not. We encourage you on checking all your options available before determining if a streamline is the right thing for you.

FHA 203(k)

An FHA 203(k) loan allows you to buy a home and make renovations on a single loan. While it’s possible to only make renovations with a 203(k) loan, this usually isn’t your most affordable choice. The minimum FHA 203(k) loan balance is $5,000 – you cannot borrow less than this. Any home repairs or improvements you make must conclude within 6 months to stay within your loan terms.

Some eligible projects you can complete with a 203(k) loan include:

  • Flooring
  • Making improvements to the home’s “modernization.” This can include adding systems like central air or an automatic garage door opener
  • Adding or replacing roofing, sections of gutters or plumbing
  • Making accessibility improvements for disabled people who live in the home
  • Making structural repairs and changes to the home’s foundation

There are two different types of 203(k) loans: Standard loans and Limited loans. Limited loans require less paperwork for approval, while Standard loans give you more freedom to repair your property.

Is an FHA loan right for you?

FHA loans is probably the easiest entry-point for anyone to get a mortgage when compared to the other options, especially, conventional mortgages. If you are struggling with your credit, your debt to income ratio is a little high and you don’t have the capacity for a big down payment, FHA financing may be the best solution for you.

Regardless of whatever option you choose, be aware that FHA tends to be the most expensive loan over time. This is due to the FHA mortgage insurance premium which may be more costly when compared to the PMI of a conventional loan.

Andes Mortgage makes it convenient to see if an FHA loan is right for you. Click this link to learn if you are a candidate for this program or, if other programs may be a better fit for your personal situation.

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