Your Complete Guide to FHA Loans
When it comes to buying a new home, you have a lot of options when it comes to which loan type you use. Sometimes, however, the amount of choices can feel overwhelming.
Should you get a conventional loan? What about a USDA or FHA loan? Which one is right for your situation?
While we can't provide all of these answers without talking to you first so we can understand your situation, we can arm you with more information. In this post, we'll cover a single loan type—FHA loans—so you can decide if it might be the right loan type for you.
What Is an FHA Loan?
An FHA loan is a type of mortgage that allows borrowers with less-than-ideal qualifications to obtain home loans. These loans are backed by a government agency called the Federal Housing Administration—or FHA.
By insuring these loans types, the FHA provides a guarantee to lenders that if you default, they will help repay a portion of the original loan. It's this guarantee of repayment that minimizes the risk lenders face when funding mortgages for borrowers who don't have a perfect credit history.
Lenders who offer FHA loans must adhere to the FHA's guidelines. As long as the guidelines are followed, you can receive either a fixed or variable rate mortgage. Or, if you already own a home, you could potentially qualify for an FHA 203(k) loan to help finance needed home renovations.
What Are FHA Loan Requirements?
The credit score requirements for an FHA loan are a lot more flexible than for a conventional loan. For example, some lenders will allow you to qualify for an FHA loan with a score as low as 500, though many do have a requirement of at least 580.
Regardless of the specific credit score cutoff, however, the simple truth is that borrowers with poor credit can still qualify for an FHA home, even if their low scores would prevent them from getting a conventional loan.
As part of the credit score requirement, it is also important to mention that usually borrowers with a recent bankruptcy or foreclosure cannot qualify until enough time has passed. For those with a Chapter 13 bankruptcy, you'll need at least one year of verified, satisfactory payments. Chapter 7 bankruptcy requires you wait two years from the discharge date and foreclosures usually require a three year waiting period.
Additionally, the FHA doesn't allow borrowers to qualify if they are behind on their student loans, taxes, or other federal debt.
However, even if you're not confident you'd qualify, there is still a chance that you could, depending on your circumstances. Some people have no credit history at all or some form of nontraditional history, but they do meet other qualifications and are approved for a loan.
If you're interested in an FHA loan, you can always talk to an FHA-approved lender, like our team at Elevate Mortgage Group, to find out for sure if you qualify.
Though FHA loans have a down payment requirement, one of their major advantages is how low it is!
Depending on your credit score, you might be able to qualify for a down payment of only 3.5%. Usually the cut off for this down payment option is a 580 or higher credit score.
If your credit score is below 580, you're still not out of luck! You can still qualify for an FHA loan, but you'll likely have a little bit higher down payment requirement of 10% down.
Saving up a 20% down payment can sometimes make it seem like it will be impossible to ever get into a home. Luckily, the lower down payment requirements for FHA loans makes it more possible.
Finally, another down payment requirement for FHA loans is that you can use financial gifts to pay for it. So, if you have parents, grandparents, or others who want to help you get into your new home, FHA loans allow them to help! Other types of non-FHA loans don't always allow this.
One disadvantage of FHA loans is the required mortgage insurance. You have to pay both a monthly mortgage insurance premium (MIP) and an upfront MIP, which helps provide protection to the lender in case of default.
Upfront MIP, which is a single charge of 1.75% of the loan, can be paid at closing when you take out the loan, or it can be added to the loan amount and paid over time.
Monthly MIP is paid every month with your mortgage payment. The monthly amount is based on multiple factors, including your loan amount, the length of time it will take to pay it off, and your loan-to-value ratio (LTV).
In an example from Zillow.com, if you paid more than 5% down on a $300,000, 30-year mortgage, your annual insurance premium would be $2,400, which is about $200/month.
The FHA requires that the home you wish to purchase is appraised by an FHA-approved appraiser. The appraiser's job is to ensure that the property meets FHA standards for health and safety.
If the appraiser determines that the property must have changes made in order to meet these standards, you can negotiate with the seller to have them pay for the changes, or you can pay for them at closing.
Certain closing costs are required up front during the application process and during the closing of the loan. These costs are often between 2% to 5% of the loan amount.
You may also be able to have other parties—such as the lender, builder, or seller—pay for some of these closing costs. This is usually done as an incentive for one of those parties to try to get you to do something like take out the loan, use a builder's services, or buy a house that the seller wants to leave.
Having one of these groups pay one or even multiple closing cost for you is typically to your benefit. However, just be warned that it could come with downsides. Some lenders, for example, may charge a higher interest rate on your loan in order to offset the cost of taking care of a closing cost.
So before you sign, make sure you're really getting the best deal by shopping around with several lenders, including Elevate Mortgage.
Minimum and Maximum Loan Amounts
The FHA sets a minimum and a maximum FHA loan amount every year, which is based on the home prices at the time. These "floor" and "ceiling" amounts vary depending on where the home is.
Check out the FHA Mortgage Limits page for the current amounts in your county.
When applying for an FHA loan, the FHA requires you to prove that you have a history of steady employment. Ideally, they would prefer that you have at least a 2-year history with the same company or employer where your income has either maintained or improved.
This requirement exists so that the FHA, and your lender, can establish that you're a good credit risk. They want to be sure that you're able to pay your bills and that you won't default on your loan. If you default, then the FHA is on the hook for part of your loan, and the lender loses out on the rest of what they should have been paid.
However, there are all kinds of different employment circumstances that can still make you an acceptable risk, so even if you don't meet the 2-year preference, you can still talk to one of our expert loan officers at Elevate Mortgage.
Debt-to-Income Ratio (DTI)
DTI refers to the percentage of your gross monthly income that is spent on debts, and there are two different numbers your lender will look at.
Your front-end DTI refers to how much of your gross income specifically goes toward house-related debts like mortgage, and it will need to be around 31% or less.
Additionally, your back-end DTI refers to how much of your gross income goes to all debts. Typically, it should be below 43% if you want to get approved for an FHA loan.
Keep in mind that these numbers are not set in stone. Depending on your other qualifications, your lender may be able to allow a higher DTI.
Who Can Apply for an FHA Loan?
To qualify for an FHA loan, you must be a lawful U.S. resident with a social security number. You also must be old enough to legally obtain a mortgage in your state.
You can apply with any FHA-approved lender, which includes everything from large banks to specialized lending companies. Again, we recommend that you contact about 3 lenders to compare offers, especially if one of them is us!
What Are the Current Rates for FHA Loans?
Usually, the higher your credit score, the better your interest rate will be. In addition, the type of loan term you choose can also affect your interest rate. In general, loans with shorter terms, like a 15-year mortgage, have lower interest rates than longer term loans, like a 30-year mortgage.
Another example of how rates can be affected by different factors is that adjustable-rate mortgages (also known as FHA ARM loans), usually have a lower introductory interest rate than a fixed-rate FHA loan. If you'll be moving or refinancing before your interest rate increases (usually around the 3, 5, 7, or 10 year mark, depending on your loan), an FHA ARM might be a good choice.
As you can see, it's hard to pin down an exact FHA interest rate be cause so much depends on your unique situation and needs. In order to get a clearer idea of what rates might look for you on an FHA loan, your best bet would be to contact us at Elevate Mortgage Group.
With just a little bit of basic information, we can give you a more accurate idea of what kind of rates you'd be looking at.
For more information about FHA loans or to get started today, feel free to contact the experienced loan officers at Elevate Mortgage Group by calling 888-935-3828. We can help you explore your home loan options.