FHA Loan Guide
Updated: Dec 19, 2022
What is an FHA Loan
An FHA loan is a type of mortgage insured by the Federal Housing Administration that may let you make a down payment as low as 3.5%. It can also have less-restrictive credit requirements than many conventional home loans.
The FHA only insures the loans, as these are government-backed mortgages that are not directly issued by the Federal Housing Administration. Instead, it protects lenders by providing mortgage insurance and repaying them if the borrower defaults on the loan. The FHA charges borrowers (you) a fee to cover that commitment. Despite the charge, an FHA loan remains appealing to people and families with low to moderate-income levels for the following reasons:
· Low down payment requirement (as low as 3.5%).
· Closing costs could run lower as compared to a conventional loan.
· The seller of the house can contribute up to 6% of the sale price to help cover closing costs.
· Gift funds are also allowed to cover closing costs and down payment
· Credit score requirements also tend to be a bit lower than other mortgage loan programs.
Due to these advantages, Homeownership rates in the United States have been steadily rising. FHA has helped Americans by creating jobs and reasonable mortgage rates for the middle class, financing military housing, and producing housing for the low-income and elderly. With a homeownership rate of 64.2 percent, since 1934, the Federal Housing Administration (FHA) has insured over 46 million home loans.
FHA Lending Limits
The FHA establishes annual lending limits for the home loans it will cover. These restrictions are set by the county in which you live and the sort of property you're looking to buy. Low-cost locations have a lower limit, known as the "floor", while high-cost areas have a greater limit, known as the "ceiling”. For single-
family properties, the ceiling loan limit is frequently more than double the floor loan maximum.
These restrictions also differ depending on the type of property.
The current FHA Loan limits also vary from state to state, you can find out the limits for your location on the FHA Website.
FHA Loan Requirements
To apply for an FHA loan, you must meet numerous conditions, including being a legal resident of the United States, having a valid social security number, and providing bank statements for the previous 30 days as well as any proof of deposits made. Other requirements include:
· Have a credit score of at least 580.
· Proof of income.
· Track record of on-time bill payments.
· Provide the names and locations of employers for the past two years.
· Filed personal tax returns for the past two years.
· If self-employed, provide a valid business balance sheet.
· A review of a credit report.
· Provide details for a savings account and other asset accounts owned
FHA Debt To Income Ratio Requirement
Debt-to-income ratios vary depending on the state but the FHA's basic rule is that your monthly mortgage payments should not exceed 31% of your gross income. When you add your house payment to the rest of your debt, your total debt should be less than 43% of your income. In some circumstances, higher ratios may be explored. We have seen debt to income ratios get approved as high as 55%. If you don't have a lot of credit history, this is a good loan option to get because non-traditional forms of credit are acceptable.
Your lender will check your financial statements and accept or deny your application within 24 hours if you meet the conditions and supply the required proof. You will also be required to pay an up-front mortgage charge call UFMIP but that is financed into your loan amount and a monthly mortgage insurance premium that will be included in your payment.
FHA Loan Rates
FHA loan rates fluctuate across participating lenders, much like other forms of mortgage loans. You might find that some lenders are willing to provide you with a better deal. Some may offer lower interest rates in exchange for greater closing fees, and your FICO scores may play a significant part in selecting what mortgage loan interest rate you are offered.
That means searching around for an FHA loan is a vital aspect of being a well-informed borrower. You might find a lender ready to offer you interest rates that aren't accessible at a rival financial institution.
Allowable Charges and Closing Costs
While FHA guidelines stipulate which closing fees are acceptable as borrower charges, each local FHA office determines the specific costs and quantities that are deemed fair and usual. Other fees are normally not authorized and are covered by the seller when purchasing a new property or by the lender when refinancing an existing FHA loan.
· The origination fee charged by the lender
· Fees for attorneys
· The charge for the appraisal as well as any inspection fees
· The cost of title insurance and a title search
· Preparation of documents (by a third party)
· Inspection of the property
· Reports on credit (actual costs)
· Taxes, transfer stamps, and recording fees
· Fees for tests and certification
Frequently Asked FHA Loan Questions
What credit scores can qualify for the most money?
If you're concerned that your credit scores won't cut it, find out what the minimum FICO scores are for maximum financing, as some credit scores require a larger down payment. Supreme Lending allows a 580 minimum credit score to qualify for a FHA loan.
Which loan is more expensive, the FHA or the conventional?
The most direct questions can sometimes yield the most useful information. Request that your loan officer analyzes the expenses of FHA and non-FHA mortgages, and determine which loans would assist or hurt your bottom line based on closing costs, loan requirements, loan term length, interest rates, and other factors.
Is it possible to refinance into an FHA loan?
Refinancing into an FHA loan from a conventional loan is a great option for homeowners who want to
refinance but don't have the perfect credit to qualify for a conventional refinance. An FHA loan may have a lower interest rate, but you will have to pay mortgage insurance for the life of the loan.
What happens if I don't make my FHA loan payments?
You want to make your payments on time to avoid any issues with your FHA loan repayment. If you fall behind on your FHA loan, you must act promptly. Never disregard it because it may lead to foreclosure. A loan officer can assess your situation and offer advice on how to keep your FHA loan payments on track.
Your FHA mortgage may be delayed from foreclosure for ninety days beyond the payment due date if certain specific circumstances apply. If your house is in an area declared a natural disaster region by the President of the United States, these circumstances can include things like a reduction or loss of income due to natural disasters and other events.
However, if your income has been reduced due to a natural disaster-related injury, call your FHA loan officer right away. With an FHA loan, you may have more assistance than you realize.
Is it necessary for me to adjust my spending habits before applying for an FHA loan?
When qualifying for an FHA loan, there is one significant mistake that homeowners can easily make. This is due to making large credit purchase right before or during the loan application.
Before you close on your home, don't add to your debt-to-income ratio by making a large purchase. Keep in mind that your debt estimations are based on your existing bills and expenses.
Any substantial credit purchase will have a significant impact on the balance you've had in the past. When it comes to FHA loan approval, it can sometimes be enough to tilt the scales against you.
If you can afford to, it’s a good idea to pay off your current auto loan or other revolving debt before applying for an FHA loan. Getting rid of any debt on your record will help you qualify for an FHA loan. However before doing this you should consider your overall financial situation and how much cash you'll need for a down payment and other relevant expenses before paying off any of your significant debts. Always visit a financial planner or ask your lender for assistance if you have any doubts.
The FHA Loan is the most popular type of mortgage among first-time homeowners, and there are several reasons behind this. In most cases, a minimum down payment is necessary. The length of time a home buyer must reside in the property; the location of the home, where the homebuyer currently lives or works, and the maximum amount of household income for the applicant is normally covered by guidelines.
There may be a lot of unknowns for a first-time homebuyer. Whether it's the influx of fresh information, mortgage jargon, types of home loans, or even down payment requirements can be daunting.
If you have any questions about FHA Loans please contact the Schmidt Team at NEXA Mortgage for a no-obligation consolation.