FHA Home Loans
Government-backed FHA home loans offer a path to homeownership. Because the Federal Housing Authority insures them, lending requirements are relaxed.
3.5% Down Payment
Relaxed Credit Requirements
Higher Loan Amounts
FHA loans benefit borrowers who do not qualify for a conventional home loan.
FHA loans have relaxed credit requirements and more leniency on the debt-to-income ratio. First-time homebuyers can get on the real estate ladder sooner and not miss out on years of equity growth.
FHA Loans can be used for new construction homes.
You might be surprised to find out that you can utilize FHA loans to finance a new build. An FHA loan for new construction loan will require the builder to provide documents, plans, completion warranty, and wood destroying insect report. Some homes with a septic tank or well water will require further health and safety reports.
FHA loans are an excellent option for buyers who qualify for a conventional mortgage but seek a slightly higher loan amount.
FHA loans allow a higher overall back-end debt-to-income ratio than conventional loans and combined with typically lower interest rates, some borrowers will be able to qualify for higher loan amounts than using a conventional loan. For home buyers, borrowing a slightly higher amount can be helpful in higher-priced real estate markets.
What is an FHA Home Loan?
If your minimum credit score isn’t meeting other loan standards, an FHA loan that is insured by the federal government may be your best option. FHA loans are mortgages issued by approved lenders designed to help low to moderate income borrowers qualify for the financing they need to finance a home. It is possible to qualify for an FHA loan, even if your credit score is less than perfect, vs. a conventional mortgage loan. The down payment is small but more than a conventional loan (3% if first-time homebuyer) and 0% for qualifying VA.
The History of FHA Loans
During the Great Depression, the Federal Housing Administration, now commonly known as FHA, was created to help Americans become homeowners by decreasing the down payment and credit score requirement by offering mortgage rates that were more attractive during an era where it was almost impossible to get a home loan.
FHA Loan Basics
There are various types of FHA loan programs to meet the needs of many borrower situations. FHA home loans are very appealing for home buyers that would not otherwise be able to qualify for a conventional mortgage.
- Loan duration will vary, with a maximum loan term of 30 years.
- The max loan limits of an FHA loan is determined by property type and the local cost of living. The current FHA loan limits range from $420,000 to $1.2 M.
- FHA loans make the home buying process more accessible for homebuyers with less than perfect credit.
Fast FHA Facts
- Backed by the Federal Housing Authority (FHA)
- Low down payments starting at 3.5%
- Relaxed credit score requirements— FHA loans have a lower minimum credit score.
- More lenient debt to income requirements
- Higher loan amounts
- FHA loans may have closing costs that are not required by conventional loans.
- FHA rules are more tolerant regarding cash gifts being utilized as down payments.
Easier to Qualify, Build Equity Sooner
Instead of waiting for perfect credit to purchase your home, you can buy a home sooner with an FHA loan and begin building equity.
Qualify for an FHA Loan
A minimum credit score, typically around 580 or higher
Minimum of 2 years worth of W2s or one year of self-employed tax returns
Proof of income: Last 30 days of paystubs or last two months of business bank statements (if self-employed)
Property assessment from an FHA-approved appraiser
Satisfactory debt-to-income ratio or DTI
Current debt data including credit cards, alimony, auto loans
Real Estate Options with an FHA Loan
Financing single-family homes
Certain types of manufactured homes
Purchase *2-4 unit multi-family homes
(*as long as at least one of the units is owner-occupied)
FHA Vs. Conventional Loans
Knowing the difference between FHA and conventional home loans could determine how soon you can make your way into the home buying market. The most notable difference between the two is that it will be far easier to qualify for an FHA loan because the federal government guarantees it.
Although FHA loans were initially designed for low to middle-income borrowers, they’re available to everyone, including borrowers who qualify for a conventional mortgage.
With FHA loans, you may qualify for a mortgage loan even if your credit is less than perfect. In some circumstances and other qualifications, your minimum credit can be as low as 500. However, you will want to keep your credit score over 580 to maximize financing and to qualify for a 3.5% down payment.
Conventional loans will typically require a much higher credit score than an FHA.
In comparison, a conventional mortgage will, in most cases, require a good credit score of 620 or higher, depending on the mortgage lender. Conventional loans with FICO scores less than 700 and down payments less than 20% will also have mortgage insurance.
An FHA loan may be better for you if the conventional interest rates and mortgage insurance are higher than an FHA. An experienced mortgage lender will be able to evaluate which loan type is in your best interest.
On an FHA loan, interest rates will typically be lower than conventional loans because they are backed by the government (insured) for the life of the loan. This loan will signal to the lender that there is less risk and may offer a better rate because the federal government supports it.
Spotless credit could be a determining factor when applying for your loan. The interest rates on a conventional loan depend on factors influenced by your credit score, loan-to-value ratio (LTV), and debt-to-income ratio.
FHA Mortgage insurance premiums (MIP) are required for FHA loans.
- An upfront mortgage insurance payment is due at closing. It will be listed on your loan estimate and added to your closing costs. The upfront mortgage insurance payment is 1.75% of your total loan amount. It can be paid either at closing or rolled into the loan balance.
- FHA Mortgage insurance premiums (MIP) will last throughout the life of the loan in your monthly payment.
A conventional mortgage will not require FHA mortgage insurance; however, you will still be required to carry private mortgage insurance (PMI) if the down payment is less than 20%.
- Private mortgage insurance can be canceled once you have at least 20% equity in the home.
Not every property on the market will match the criteria for every loan type. The home that you choose will affect the home loan options available to you.
Knowing which properties are up to code could be the determining factor when making your choice to purchase. FHA loans will limit properties to those that don’t meet HUD standards, but repairs can be made to clear the loan for funding on the purchase of the property. If you plan to buy a single-family home using conventional mortgages, the property will not be restricted by HUD standards, and thorough inspections are not required, but they will have to undergo an appraisal to verify that the loan value is covered by the market value of the property.
Conventional loans have many requirements but do not require a home inspection. They do most often (not always) require an appraisal.
With an FHA loan, borrowers can buy an owner-occupied primary residence. FHA loans are not available to finance investment properties or second homes that won’t be owner-occupied.
With a conventional loan, there are fewer loan limits on how the property will be utilized and can be used to purchase vacation homes, investment properties, and primary residences.
The Pros and Cons of FHA Backed Loans
FHA Loan Pros
FHA loans only require down payments as low as 3.5%
FHA loans allow for higher debt ratios
FHA loans are a go-to for first-time homebuyers who have lower credit scores.
More lenient approval standards— you may still qualify for home loans through the Federal Housing Authority with credit card balances, prior bankruptcy, or foreclosure.
FHA Loan Cons
An upfront mortgage insurance premium of 1.75% of the loan amount will be paid at closing or financed into the loan amount.
You will be required to pay a monthly mortgage insurance premium for the lifetime of the loan.
You can not use an FHA loan to purchase a rental or investment property.
How Your Credit Score Can Affect Your FHA Loan
When applying for an FHA loan, it’s important to remember that your FICO score will impact your ability to purchase a home. Your FICO score is a 3-digit number that will be based on all the information inside your credit reports. If you have a minimum credit score of 580 or higher, the down payment on FHA loans can be as little as 3.5%. However, less adequate credit scores can mean you’ll have to come up with at least 10% of the total purchase price.
Pro Tips for Good Credit Scores
- Keep your revolving debt below 30% of your available credit for credit cards to protect your credit scores.
- Be on time with your monthly payments for credit cards, personal, student, and auto loans.
- If your credit score isn’t measuring up, Nathan Mortgage offers simple credit repair solutions to get you approved for an FHA loan!
When applying for any mortgage, lenders will review your DTI ratio. These requirements will always vary by lender, but typically with conventional mortgages, the borrower’s DTI can be as high as 50% (housing costs can never exceed 47%). With an FHA loan, overall DTI can exceed 55% DTI ( housing costs can never exceed 47%).
3 Easy Steps to Calculate DTI
Many home buyers worry they carry too much debt to qualify for a home loan. Student loans are often a big worry. Student loan or credit card debt shouldn’t stop you from getting a consult to see if you qualify for a home loan. A mortgage lender will calculate your DTI to get the most accurate figure.
- Add your monthly debt payments. This includes credit card, student, auto, and other loan payments, as well as court-ordered fixed payments, like child support.
- Divide your monthly debt by your gross monthly income (all of your income before taxes and insurance)
- Keep in mind that self-employed, part-time employment, overtime, bonuses, child support income, etc., may be factored differently and will be reviewed by the Loan Officer and Underwriter. Social Security income can be used as well.
- Multiply that number by 100 to get your percentage, which will be your DTI ratio.
Getting Your Foot in the Door
Applying for a home loan isn’t like applying for credit cards and can be the most sizable purchase you may ever have to tackle, and the cost can pile up quickly between the down payment, appraisals, mortgage insurance premiums, and closing costs, to name a few. These expenses can make homeownership seem like it’ll never be within reach, but there are payment assistance programs that can give you the edge you need to get your foot in the door.
Down Payment Assistance Programs can make the difference between being able to get into a home or not if the borrower has limited funds. However, they aren’t in the best interests of all borrowers and have some downsides that may negatively impact borrowers, the strength of their home offer, and the amount of loan they qualify for.
Getting help from family or friends.
You don’t have to rely on savings when coming up with the down payment! You can use gift money from a family member for your FHA down payment, as long as the benefactor provides a letter that includes
- Their contact information
- Relationship to you
- The amount of the gift
- Statement validating that there is no repayment expected
Q: Can personal loans be used for the FHA loan down payment?
A: FHA loans do not allow personal loans to be used for the down payment.
Down Payment Programs
If you’re coming up a little short on the down payment for a home, the Colorado Housing and Finance Authority may be able to help. CHFA offers a number of loan programs that assist you with your down payment, closing costs, and low or no mortgage insurance.
Receive up to 5% down payment assistance on FHA loans with a minimum credit score of 600. A highly recommended down payment assistance program that also includes post-purchase counseling.
Down Payment Programs
Home buying can be an uphill battle for some, especially when finding the funds to purchase a home. Looking into the Illinois Housing Development Authority can be highly beneficial as they offer up to $10,000 in assistance. Qualifying borrowers are able to couple their FHA loan with a $6000 forgivable grant!
Using Your FHA Home Loan:
Your New Home Must Meet Federal Housing Administration Loan Requirements.
Required: Home Appraisal
Bottom line, the FHA requires that the lender have an appraisal on the property. Whether purchasing a single-family home, condo or manufactured home with an FHA loan, minimum property requirements must be completed before being approved. The FHA home loan will require an appraisal separate from a typical home inspection to ensure HUD requirements are met. However, if you’re applying for a renovation or FHA 203 (k) loan, the property could go through a two-part appraisal, the first one being done “as is” and the second appraisal after the improvements have been made to calculate the value of the property after the renovations have been completed.
Required: Professional Inspection
When the appraiser arrives at the property, they will inspect the home’s exterior and interior to calculate the house’s value and ensure that it meets the requirements set by the Federal Housing Administration. They will also take photos and document any issue they may see during their observation of the property. The key takeaway is that if the home doesn’t meet the minimum FHA requirements, the appraiser might recommend further inspection or request repairs done by a professional before moving the transaction forward.
Inspections and Appraisals: What’s the Difference?
Doing both an appraisal and an inspection may seem redundant to some homebuyers, but there are essential differences between a home inspection and an appraisal.
An ounce of prevention is worth a pound of cure when it comes to getting a home inspection. You will want to arrange your inspection of the property to give you the confidence you need going into the purchase of the property. An inspection will be a thorough evaluation of the property’s condition, giving you the confidence you’ll want when deciding to buy, whereas an appraisal will be a thorough and comparative estimate that will signal to your mortgage lender a clear picture of the home’s current market value. The U.S. Department of Housing and Urban Development, commonly known as HUD, strongly urges any borrower to acquire a professional home inspection aside from the necessary FHA appraisal. It will be up to you to hire a qualified home inspector. Doing your due diligence will likely be worth every penny, even just for peace of mind and confidence when it comes to buying your home.
FHA Energy Efficient Loans
Going Green with an Energy-Efficient Loan
If you’re looking for a great way to help save the planet and lower your monthly utility bill, an Energy Efficient Mortgage Loan may be right for you. Energy-efficient living is possible with these types of FHA loans insured by the Federal Housing Administration.
Energy Efficient loans help homebuyers significantly reduce more than just their carbon footprint as it rolls the cost of adding energy-efficient improvements into new construction and existing real estate. You will also be able to bundle your closing costs and upfront mortgage insurance premium into the total cost of the loan, which is what makes the Federal Housing Administration’s Section 203(b) Energy Efficient Mortgage so popular. Homebuyers who are looking to go green can use this loan and avoid taking out new credit cards to finance their upgrades or having to wait on a refund from their tax returns.
Refinancing Your FHA Loan
Whether reducing your monthly mortgage payment or achieving a new financial goal, you may want to look into refinancing. FHA Streamline Refinancing is designed to reduce monthly interest rates and charges. Refinancing generally requires less effort and documentation than obtaining a purchase loan.
Note: You Can Refinance in the Future Using a Conventional Mortgage to Remove Mortgage Insurance.