Learn what an FHA loan is and who it supports.
Discover the benefits of an FHA loan.
Find out the requirements to qualify for an FHA loan.
FHA home loans are government-backed mortgages insured by the Federal Housing Administration (FHA).
The Federal Housing Administration is not a mortgage lender. Instead, they guarantee payments if ever the borrower defaults on the loan.
Most first-time buyers opt for an FHA mortgage loan because it requires lower credit scores and a reasonable minimum down payment.
FHA mortgages are issued through FHA-approved lenders. This loan program is popular because it supports low- to moderate-income borrowers who do not qualify for a conventional mortgage loan or those who are not able to put a 20% down payment.
However, since FHA mortgage borrowers are deemed to have a higher risk of default, they'll be required to pay for a mortgage insurance premium (MIP). This coverage is meant to protect the lenders in case the borrower is unable to make a timely monthly payment or stops making payments altogether. FHA home loans involve two mortgage insurance premiums: upfront and annual.
FHA home loans involve two mortgage insurance premiums: upfront and annual.
Upfront mortgage insurance premium (UFMIP) is equal to 1.75% of the loan amount. This is a one-time fee the borrower must clear at closing. For example, if you borrow $250,000, your UFMIP would be $4,375. Alternatively, you can opt to add this cost to your mortgage balance.
The annual MIP rate, on the other hand, can be between .45% to 1.05% depending on the length of the mortgage term (15 years or 30 years), the mortgage amount, and the initial loan-to-value (LTV) ratio. The amount would then be divided by 12 and paid monthly. The annual MIP will be calculated every year and will be incorporated into your monthly mortgage payments.
How long you'll pay the annual MIP will depend on your down payment. If you can make a 10% or higher down payment, you'll pay the annual MIP for 11 years. But if your down payment is less than 10%, you'll have to pay the MIP for the life of the loan.
Due to their flexible requirements, FHA mortgages are easier for borrowers to obtain. Here are other big advantages that you can get from this home loan:
With an FHA mortgage, you don't need a perfect credit score. The program allows a minimum score of 500, which is lower compared to other loan programs. Typically, a conventional mortgage would require a minimum credit score of 620, USDA home loans need a 640, and a VA loan requires at least a 580 credit score.
The FHA loan program is insured by the federal government and offers flexible qualification guidelines created specifically for first-time homebuyers. And with the help of mortgage brokers, the loan process would also be less stressful.
With FHA home loans, you can purchase a home with as little as a 3.5% down payment with a credit score of at least 580. If your score is 500 to 579, you will have to give a 10% down payment. However, FHA mortgages allow gift funds from acceptable donors if you don't have enough cash.
When you buy a home, you will be responsible for certain out-of-pocket expenses, such as loan origination fees, attorney fees, and appraisal costs. However, FHA mortgage loans allow the seller, home builder, or lender to pay some of these closing costs for you. If the home seller is having a hard time finding a buyer, they might just offer to help you out on the closing costs as a deal sweetener.
When applying for FHA loans, lenders will likely ask you to provide documents to prove that you'll be able to repay the mortgage. Here are some of the documents that your lender may require:
FHA loan eligibility is often perfect for first-time homebuyers since the program was created with them in mind. But even if you are no longer a first-time buyer, the requirements for the FHA program make it a very tempting option for some. To obtain this mortgage, FHA requires the following primary components:
FHA guidelines allow borrowers with credit scores as low as 500. But keep in mind that lenders will still have to check your financial situation and that some lenders might require higher credit scores.
If your FICO® score is 580+, you can make a minimum down payment of 3.5%. If it's between 500 to 579, your minimum down payment required would be 10%.
FHA loans can assist individuals or spouses that don’t have ownership of a principal residence with a current loan (exceptions may apply).
The home you are buying with an FHA mortgage must be your principal residence for the next 12 months. Additionally, at least one borrower must occupy the property within 60 days after closing.
Your front-end debt ratio, also known as the housing ratio, is the portion of your monthly income that goes to housing expenses. Your front-end ratio should not be more than 31% of your gross monthly income. However, some lenders may allow up to a 40% front-end debt ratio if your credit score is 580+.
Also known as the debt-to-income (DTI) ratio, your back-end debt ratio is the portion of your gross monthly income that goes into paying off monthly debt expenses. Lenders prefer if your DTI is 43% or less.
You must show a stable employment background history or proof that you have been working for at least 2 years.
You must verify your income through pay stubs, bank statements, and federal tax returns.
FHA mortgage lenders require a home appraisal for two reasons. One is to estimate the market value of the property and the second reason is to know if the property passes the FHA appraisal guidelines.
The FHA loan process can be overwhelming, especially for first-time home buyers. Thankfully, Ebenezer Mortgage Solutions is here to make this process fast, easy, and stress-free for you. Here's a quick rundown of how the FHA loan process works.
To start with the FHA loan application, we'll ask for your basic details which include your name, Social Security number, estimated income, property address, estimated value, and your requested loan amount. Ebenezer Mortgage Solutions will then process your application with various mortgage lenders.
FHA mortgage loans have limits on how much you can borrow. These limits are set according to the location and type of property you want to purchase. However, FHA mortgage limits change each year to suit the current housing market.
In general, the U.S. Department of Housing and Urban Development (HUD) determined that the FHA loan limit is set at 115% of the median home price for a single-family home in a county. This is why low-cost areas have a lower limit, and high-cost areas have a higher limit.
Some FHA mortgage lenders offer jumbo mortgages. This type of mortgage is meant for an FHA purchase that is beyond the loan limit set in your area. As you might expect, the requirements for a jumbo mortgage are tighter compared to a regular FHA mortgage.
Generally speaking, an FHA loan is easier to qualify for compared to a conventional mortgage. With an FHA loan, you'll be paying for MIP for the life of the loan if your down payment is less than 10%.
With a conventional loan, the PMI (private mortgage insurance) will automatically cancel once you reach 78% of your home's purchase price.
Learn more about the differences between FHA and conventional home loan programs here.
This is a misconception. FHA mortgages are available for anyone who qualifies. But since it has more relaxed requirements, the majority of the applicants are first-time home buyers.