Thanks, in part, to lenient low down payment and credit requirements, plenty of borrowers find FHA loans appealing. Consider that you can get an FHA loan with a down as low as 3.5 percent and a FICO score of 580, and you can see how attractive they are to buyers with limited savings and less-than-soaring credit scores. Naturally, an FHA loan is also a terrific option for first-time homebuyers.
As a government agency, the Federal Housing Administration insures mortgage loans in the United States. The FHA protects mortgage lenders if the property owners default on their loans, allowing FHA loans to be more forgiving and flexible than most conventional loans.
Although the Federal Housing Administration (FHA) has been part of the U.S. Department of Housing and Urban Development (HUD) since 1965, it was conceived more than 30 years before as a critical point of President Franklin D. Roosevelt’s New Deal. A series of perfect storms capped by the Great Depression saw the housing market edging toward collapse, and by 1933 roughly half of all U.S. home mortgages were in default. Roosevelt’s National Housing Act of 1934 stemmed the tide of foreclosures and helped make homeownership more affordable, thus improving housing conditions. It paved the way for the FHA to revive mortgage lending and prop up an ailing construction industry.
During World War II, the agency financed military and veteran housing, then aided construction efforts for low-income housing from the 1950s through the 1970s.
Today the FHA has active insurance on more than 8.3 million single-family mortgages.
FHA loans are originated only by FHA-approved lenders and insured by the Federal Housing Administration. Borrowers can use FHA home loans to purchase or refinance single-family houses, two-to four-unit multifamily homes, condominiums, and some manufactured and mobile homes. Specific types of FHA loans can also be used for new construction or for renovating an existing home.
There are several FHA mortgage loan programs from which borrowers may choose, depending on the type of property they’re purchasing or refinancing. FHA loans range from standard purchase loans to products designed to meet specific needs. Here’s an overview of FHA loans commonly used by homebuyers:
The 203(b) is FHA’s standard mortgage loan which can only be used on new or old single-family homes and FHA-approved one-to-four-unit multifamily homes. The FHA 203(b) loan program provides affordable 15 and 30-year mortgages. FHA 203(b) loans allow a down payment as low as 3.5 percent, and the credit qualifications are less stringent than for conventional loans.
An FHA 203(k) allows a buyer to finance a home purchase and renovation with one loan. So, if you fall in love with a house that needs work, an FHA 203(k) allows you to fold the renovation costs into the mortgage. You’ll pay for those upgrades over time as you build equity. This loan is for an owner-occupied home only.
You should note there are two types of FHA 203(k) loans available: the limited or streamline and the standard. Each rehab loan offers a 203(k) refinance option for current homeowners.
The 203(k) limited loan provides up to $35,000 for renovations, with major structural repairs ineligible.
The 203(k) standard loan dictates that renovations must total at least $5,000 and major structural repairs are eligible, but borrowers must hire a HUD consultant to oversee the rehab process.
Ask your lender which would benefit you the most.
Whether you plan to buy an energy-efficient property or want to finance green improvements to your current home, the Energy Efficient Mortgage (EEM) program is an FHA loan product worth considering. The FHA EEM was designed to help homeowners save money on their utility bills by financing energy-efficient improvements with their FHA-insured mortgage. The idea behind the EEM is pretty simple. An energy-efficient home with cost-effective energy improvements will have lower utility bills, freeing up more income for mortgage payments. However, the borrower will need to obtain a home energy assessment that determines how much money homeowners will save in energy costs with each upgrade. Improvements are considered cost-effective when they save the homeowner as much or more than the cost of improvements
Most FHA loans are fixed-rate loans, meaning your interest rates will remain the same for the life of the loan. Fixed-rate loans are ideal if you have limited or fluctuating income as they allow you to budget for your monthly payments. Unless you refinance, the interest rate will not change, so your monthly mortgage payment stays the same. You’ll have no unpleasant surprises if interest rates spiral upward.
Adjustable-rate FHA loans offer lower upfront interest rates than fixed-rate loans. However, as the name implies, those rates can increase over time. After the fixed period expires, your interest rate may go up, raising your monthly mortgage payment. For some homebuyers, adjustable-rate mortgages (ARM) provide a convenient way to lower homebuying costs at the front end. Still, they’re not ideal if you plan to stay in the property for the long haul. You might have to consider selling the home or refinancing your loan before the term ends if your interest rate rises and you suddenly find yourself with an increased monthly payment you can no longer afford.
The FHA offers a Home Equity Conversion Mortgage (HECM), a reverse mortgage program for homeowners 62 or older who own their homes outright or have only a small mortgage balance. The HECM enables borrowers to withdraw some of the equity in their homes. They can choose a fixed monthly amount, a line of credit, or a combination of both. With an HECM, borrowers can defer payment on the loans until they sell the home or move out. Homeowners, however, remain responsible for paying taxes, insurance, maintenance, and other items. Nonpayment of these can lead to a default under the loan terms and ultimate loss of the home. Note that FHA-insured reverse mortgages have an upfront and ongoing cost. Your Aligned Mortgage loan officer can provide all of the information you need to see if a HECM is appropriate for your needs.
The 245(a) loan 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 at the front end of their loan.
The FHA also offers mortgage loans for property types that include condos and mobile or manufactured homes. FHA loans are available for homeowners who have lost their homes from natural disasters. Ask your lender for more details on these loans.
FHA-approved lenders can lend to borrowers who have lower credit scores or smaller down payments because FHA loans come with the financial safety net of government backing. Generally, it’s easier to qualify for an FHA loan than other loan programs, particularly conventional loans.
Maximum loan amount
To learn about the FHA loan limits in your area, visit HUD.gov and go to the FHA Mortgage Limits page, where you can fill out a form according to your location.
FHA’s credit score requirement is based on your down payment amount. For example, if you put down the minimum amount, 3.5 percent, your credit score must be 580 to qualify. If you can come up with a higher down payment, say 10 percent, for instance, then you may be able to qualify with a credit score as low as 500. These are FHA guidelines — individual lenders can opt to require a higher minimum credit score.
The FHA requires a debt-to-income ratio (DTI) of 50 percent or less, meaning that your total monthly debt payments can’t be more than 50 percent of your pretax income. This includes debts that you aren’t actively paying.
These are the minimums set by the FHA. Lenders may have different requirements.
Once you’ve chosen a lender, you’ll have to get preapproved for your loan. At this stage, you’ll provide information about the property you intend to purchase along with your finances, which includes your income and debts. The lender will pull a hard credit report at this point. When the lender has all the information they need, you’ll receive a preapproval letter stating the loan amount you qualify for, as well as your interest rate. Getting preapproved rather than simply prequalified lets you know your buying power, and it gives the seller a sense of confidence in your offer.
After you’ve found a home and the seller has accepted your offer, you’ll complete the entire loan application process, which includes submitting yet more financial documents that include proof of U.S. citizenship or legal permanent residency and current bank statements. The lender will then get the property appraised to ensure the home is a good investment — worth what you’re paying for it — and confirm that it meets basic safety and livability standards.
Once the appraisal is completed, your loan then moves to underwriting, where a financial expert in your lender’s office verifies your income, assets, debt, and property details and, essentially, assesses how much risk a lender will take on if they decide to give final approval for your loan. You’ll be issued a conditional loan approval, and the 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’ll receive final approval and a closing date. Now you’re finally heading toward the finish line when you’ll sign the paperwork with a title company, pay your closing costs and remaining down payment and move into your new home.
At Aligned Mortgage, we value our clients and are pleased to offer FHA Loans with no lender fees. We are not charging clients who utilize a government-backed loan for underwriting fees, credit report fees, tax service fees, and flood certification fees, among others. These fees can cost you thousands of dollars. Contact us today to get started on your loan application with one of our knowledgeable and dedicated loan officers.