Navigating FHA Loans in 2021
First-time home buyers, people with lower credit scores, and those with lower incomes may be eligible for a mortgage loan from the Federal Housing Administration (FHA). This is a government agency that offers loans with lower down payments and will accept borrowers that traditional mortgage lenders and banks may not.
We're covering common questions about FHA loans.
What is the FHA?
The Federal Housing Administration is a division of the US Department of Housing and Urban Development. It was established during the Great Depression to reduce the number of foreclosures on homes, and to make purchasing a home easier for many Americans. One of the changes the FHA made was to insure mortgages for up to 80% of the house's value, and therefore establishing the 20% down payment that many buyers need.
The FHA is responsive to the changing economic climate. The agency will often make changes to important qualification metrics such as down payment amounts and home value limits. Their mission is to make it easier for people to buy houses.
What is an FHA Loan?
The FHA insures loans given by credit unions, mortgage brokers, and mortgage lenders, which protects these lenders in case of default. By doing so, the mortgage lenders can offer loans to people who may not have a 20% down payment or who have poor credit. Borrowers who typically have a credit score of 580 or above and 3.5% of the house's down payment available may qualify for an FHA loan.
Which banks offer FHA loans?
Only FHA-approved lenders can offer FHA-insured loans, so not every mortgage lender in your neighborhood may be able to offer these mortgages.
What kind of house can an FHA loan cover?
You can use the FHA loan to purchase or refinance a single-family home. Borrowers may also use FHA loans to buy multi-family homes with up to four units, condos, and some kinds of manufactured homes. Your lender can tell you which types of manufactured homes they will cover. There are also FHA loans for the renovation of an existing home or for building a new house.
What Makes FHA Loans Different from Conventional Loans?
The biggest difference between an FHA-insured mortgage and one from a traditional lender is the accessibility. It's easier for people to qualify for FHA loans, including those with credit challenges or who don't have the savings for a 20% down payment.
FHA loans may also have lower interest rates than a buyer would qualify for with a conventional loan, which makes the monthly payments lower, too. There are several kinds of FHA loans to accommodate different situations. The most common is the standard purchase loan. Other loan types include Title 1 Loans, which are the loans used to purchase manufactured houses, and FHA 203(k) loans for home renovations.
Are There Limits to FHA Loans?
Every housing market is different, and therefore the loan limits for FHA loans vary by county. Current limits can be as high as $822,375 (for housing markets with higher average home prices) to as low as $356,362, for markets with lower average home values. The Housing and Urban Development website has the FHA limits for each county, so you can check your desired location online.
Do I Qualify for an FHA Loan?
The FHA has a certain set of standards that potential borrowers must meet to qualify. It’s important to note that the lending bank may have other requirements, too, which borrowers must also meet. These can vary between lenders and every situation is unique.
The minimum credit score for an FHA loan is 500. For borrowers with scores between 500 and 579, the amount needed for the down payment will generally be higher. Lenders may require a higher credit score for approval, or a higher down payment than the FHA minimum. A credit score of at least 580-620 is what most lenders currently require.
If you have a credit score under 620, you may wish to take the time to fix it before applying for a home loan, as this can affect your interest rates. You may also wish to look for lenders that specialize in FHA loans, as their terms may be closer to the FHA minimum.
Borrowers with a credit score of 580 or higher may only need a 3.5% down payment. For borrowers with scores between 500 and 579, the down payment requirement is typically 10%, so you can see that it may be worth the extra time to boost your credit score.
Your area may have state-funded down payment assistance programs for first-time homebuyers, including low-interest or no-interest loans and grants. Lenders also look at your debt-to-income ratio, which means looking at what you owe versus how much money you make. The FHA requires a DTI of less than 50. This includes all your outstanding debt, including student loans, plus loans that are in deferment (ones you aren't actively playing on).
What are the property Requirements for an FHA Loan?
In addition to borrower requirements, the FHA also has requirements for the desired property. The agency has a separate appraisal, different from the conventional pre-purchase home inspection. The FHA appraisal process is designed to ensure that the property is a good investment and meets certain safety and livability standards. Properties that are intended to be "fixer-uppers" may have two separate appraisals, one for the "as-is" state of the property and one that estimates the value of the property after certain improvements are made.
Do FHA Loans Have Mortgage Insurance?
All FHA loans have mortgage insurance. Once you're approved you make one payment upfront, and then the monthly payments are combined with the loan payments thereafter. Borrowers who have a 10% down payment or more will pay the mortgage insurance for 11 years, while those who had less than 10% down pay mortgage insurance for the life of the loan.
How Do I Apply for an FHA Loan?
In addition to completing the application, potential borrowers must also present: • Proof of U.S. citizenship or legal permanent residency • Valid Social Security number • Bank statements for at least the last 30 days, including proof of deposits made during those times, such as paycheck stubs • Credit reports • Tax returns Individual lenders may have additional documentation requirements, including cases where part of the down payment is a gift.
If you're in the market for a home, an FHA loan may be right for you. They're easier to obtain, so even people who think purchasing a home isn't in their reach may discover they're eligible. Contact our experienced professionals today to learn more.