Is The FHA Loan Right For You?
The Federal Housing Administration is a government agency who insures mortgage loans in the United States. FHA protects mortgage lenders if the property owner defaults on their loan. This allows FHA-approved lenders to offer loans to borrowers with lower credit scores and lower down-payments than other loan products allow.
History Of The FHA Loan
The FHA was created by President Franklin Roosevelt during the Great Depression through the National Housing Act. The agency has helped to finance military and veteran housing during World War II, then helped construction efforts for low-income housing from the 1950s through the 1970s.
The FHA has insured millions of American mortgages, including single-family mortgages, multi-family mortgages, and mortgages for residential care facilities and hospitals.
What Are FHA Loans?
FHA loans are originated by FHA-approved lenders and insured by the Federal Housing Administration. FHA mortgage loans must adhere to these lending guidelines, including but not limited to:
- The safety of the property being purchased,
- The financial capabilities of the borrower
- The balance of the loan in relation to local incomes
FHA loans are designed for low and moderate-income earners, as they allow for lower down payments and lower credit scores than conventional loan options. They can be used for:
- Single-family homes
- Multifamily properties (up to four units)
- Manufactured and mobile homes
- Hospital and Care facilities
Types of FHA Loans
There are several FHA mortgage loan programs to choose from, depending on the type of property you’re purchasing, or refinancing.
Fixed-Rate FHA Loans
Most FHA loans are fixed-rate loans, meaning they offer fixed interest rates for the entire life of the loan. Fixed-rate loans are ideal if you have limited or fluctuating income as they allow you to easily budget for your monthly payments and the interest rate will never change unless you refinance.
Adjustable-Rate FHA Loans
Adjustable-rate FHA loans offer lower up-front interest rates than fixed-rate loans. However, those rates can increase over time. After the fixed period expires, your interest rate may increase, taking your monthly payment up with it.
Adjustable-rate mortgages (ARM) can be a good way to lower your homebuying costs in the beginning, but they’re not ideal if you plan to stay in the property for a long period of time. It’s important to sell the home or refinance your loan before the term ends in case your interest rate rises and the increased monthly payment is more than you can afford.
Reverse Mortgage FHA Loans
The FHA also has a reverse mortgage program, called a Home Equity Conversion Mortgage, or “HECM”. HECMs are for homeowners 62 years old or older who have equity in their home (paid off or paid down their mortgage substantially).
With a HECM, you can convert some of their equity into a line of credit, which can be pulled in a lump sum or in monthly payments.
These loans are designed to provide supplemental income to older homeowners who may not have access to other funds. HECM also allows older homeowners to stay in their homes essentially mortgage-free, though the actual mortgage continues to increase with each draw from equity. This is called Negative Amortization.
Reverse mortgages are loans offered to homeowners who are 62 or older who have equity in their homes. The loan programs allow borrowers to defer payment on the loans until they pass away, sell the home, or move out. Homeowners, however, remain responsible for the payment of taxes, insurance, maintenance, and other items. Nonpayment of these items can lead to a default under the loan terms and ultimate loss of the home. FHA insured reverse mortgages have an upfront and ongoing cost; ask your loan officer for details. These materials are not from, nor approved by HUD, FHA, or any governing agency.
Energy Efficient FHA Mortgages
Are you going to buy an energy-efficient property, or do you plan on making a home you purchased energy-efficient? Then the Energy Efficient Mortgage (EEM) program may be an FHA Loan product to consider. You can also use this loan to refinance your existing mortgage if you plan on making energy-efficient upgrades to your property.
However, energy-efficient loans are only approved if the improvement cost to the home is equal to or less than the money saved on the energy from the upgrades to the home.
203b FHA Loans
The 203b loan is FHA’s standard mortgage loan. 203b loans can only be used on single-family homes (new or old), condominiums that are FHA approved and one to four units in size.
203k FHA Loans
This mortgage program can be used to help finance both your home purchase and the renovation costs that will come with it. 203k loans are for those homes that need renovation. FHA loans can’t be used for investment properties; you must use the property as your primary residence.
There are two forms of the 203k loan program, Limited 203k, and the Standard 203k. Ask your lender which one is right for you.
245a FHA Loans
The 245a loan program is an FHA product designed for low-income home buyers. The program allows you to make smaller mortgage payments upfront and larger payments as you get further into your loan term. They are for buyers who know their income will increase in the future, but who can’t afford a high payment quite yet.
Other FHA Mortgage Loans
The FHA also offers mortgage loans for property types such as condo loans and mobile or manufactured homes. FHA loans are also available for homeowners who have lost their homes from natural disasters.
Qualifying For An FHA Loan
Since FHA loans come with the financial safety net of government backing, lenders can loan to borrowers who have lower credit scores or smaller down payments. Generally, it is easier to qualify for an FHA loan than other loan programs particularly conventional loans.
Maximum Loan Amount
To learn about the FHA Loan Limit in your area visit the HUD.gov site and fill out their form.
Credit Scores And The FHA Loan
FHA’s credit score requirement is based on your down payment amount. For example, if you put down the minimum amount your credit score must be 580 in order to qualify. With a higher down payment, you may be able to qualify with a credit score as low as 500.
To qualify for an FHA loan, you’ll need a front-end debt-to-income ratio (DTI) of 31% or less, which includes your projected mortgage payment on the house you are trying to purchase. You’ll then need a back-end of 41% or lower, which includes your projected mortgage payments plus all your current debts. In some cases, you may be able to get an FHA mortgage with a back-end DTI as high as 50%, but only if you have good credit and other factors like substantial cash reserves.
Here are the other requirements you’ll need to meet in order to qualify for an FHA loan:
- The home you’re buying must be your primary residence (at least one unit of a 4-unit property)
- You must move in within 60 days of the closing
- The home must meet FHA’s property standards and be safe, secure, and sound
- Some mortgage insurance premiums must be paid up-front and annually over the course of the loan term (Upfront Mortgage Insurance Premium may also be rolled into your loan)
- Reliable income and two years of consistent employment
- Funds to cover your closing costs
These are the minimums set by the FHA. Lenders may have different requirements.
The FHA Loan Process
Once you’ve chosen a lender, you must get pre-approved for your loan. This requires you providing information about your income, debts (credit report pull) and the property you intend to purchase. Your lender will give you a letter stating the loan amount you qualify for, as well as your interest rate. Getting pre-approved rather than pre-qualified helps you know your buying power and provides the seller confidence in your offer.
After you’ve found a home and the seller has accepted your offer, it is now time to complete the full loan application process which includes submitting several financial documents. The lender will get the property appraised to ensure the home is worth the loan for which you are applying.
When the appraisal is completed, your loan then moves forward to Underwriting. The Lender looks through your loan application and your qualifications for the loan at which time you will be issued a conditional loan approval. Your lender might then request more documents or a letter of explanation detailing any large deposits, large withdrawals, gift money, or other unusual activity in your finances. When your loan passes through underwriting you will be issued a final approval, and you’ll be given closing date. That’s when you’ll sign the paperwork with a title company, pay your closing costs and remaining down payment and move into your new home!
How Much Do FHA Loans Cost?
As with other mortgage loans, there are closing costs and a down payment associated with FHA loans. These costs vary depending on your purchase price and the interest rate you choose.
What Is FHA Mortgage Insurance?
FHA mortgage insurance is designed to protect lenders if a borrower fails to pay their mortgage. If a borrower “defaults on the loan”, the lender may foreclose on the home and subsequently sell the property.
Mortgage insurance is required on all FHA loans and usually lasts for the entirety of the loan term. If you place more than the minimum down payment, mortgage insurance is only required for 11 years. FHA Upfront Mortgage Insurance Premium costs a flat rate percentage of the loan amount, regardless of loan size or down payment. After that, you’ll also have an annual charge, which is paid monthly in your mortgage payment.
Aligned Mortgage is excited to offer FHA Loans with no lender fees! We are not charging our clients who utilize a government-backed loan for Underwriting Fees, Credit Report Fees, Tax Service Fees, Flood Certification Fees, etc. These fees can amount to thousands of dollars in savings for our clients! Contact us today to get started on your Loan Application with one of our amazing Loan Officers.