FHA Mortgage Overview – Benefits & How to Qualify

FHA Mortgage - benefits and how to qualify

The FHA Mortgage was created back in 1934 to offer affordable homeownership opportunities for borrowers in the United States. The Federal Housing Administration (or FHA) insures these loans to protect the institution issuing the loan against default.  This in turn allows the mortgage lender or bank to offer lower rates and more flexible terms than traditional conventional loans.

An FHA mortgage is an option available to people who are looking for a lower down payment or more flexible qualifying guidelines.  In many cases the FHA Mortgage down payment requirement is as low as 3.5%, and the program offers more forgiving debt to income ratio making it easier to qualify for than other mortgage options.

FHA Mortgage Resources:

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FHA Mortgage Benefits

  • Lower rates – given it’s a government-backed loan, the FHA Mortgage generally has lower interest rates than Conventional loans.
  • Not as credit sensitive – the Conventional Mortgage is a very credit driven program, meaning borrowers with higher scores get significantly better interest rates and lower mortgage insurance. FHA on the other hand doesn’t penalize borrowers with lower scores as much as you’d see on a Conventional loan, making the FHA Mortgage an ideal option for borrowers with fair to average credit.
  • Low down payment – the minimum down payment for FHA is 3.5% of the purchase price, but in some cases depending on credit and debt-to-income ratios, the amount may need to be higher. If you put 5% down you get reduced mortgage insurance, and if you put 10% down, the mortgage insurance falls off after 11 years.
  • Mortgage Insurance Premium (MIP) – this monthly premium is added to your mortgage payment and is based on the loan amount (.85% of the loan amount per year, or .80% if you put 10% down). Whereas on a Conventional mortgage, how much you pay in PMI is based on your credit score (and down payment), which means premiums can be significantly higher for borrowers with lower credit scores. Since FHA’s MIP is a flat percentage, borrowers with lower credit scores don’t get penalized and instead pay the same premium as somebody with great credit.
  • Significantly more flexible guidelines – the debt-to-income ratio on FHA loans can go to a maximum of 57% whereas Conventional only allows up to 50%. There are also shorter waiting period requirements on significant derogatory credit events such as foreclosures, short sales and bankruptcies.
  • Multi-family homes – assuming it’s your primary residence, Conventional loans require a larger down payment if you’re interested in a 2-4 unit property. FHA however keeps their minimum down payment requirement the same at 3.5%. This makes FHA an attractive option if you’re considering buying a multi-unit house, living in one unit and renting out the rest.

 

FHA Mortgage Down Payment

FHA Mortgages require a down payment of at least 3.5% of the purchase price of the home.  In some instances with lower credit scores, borrowers may be required to put more down in order to qualify.

It can come from existing assets that the customer already has in the bank or it can be a gift from family or employer. 

The down payment can also come from community grants or down payment assistance programs which vary from state to state or even city to city.  Ask your loan officer about the availability of assistance in your area.

 


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FHA Nuances & Things to Be Aware Of

  • Loan Limits - FHA mortgages have loan limits that vary by state and are generally lower than the loan limits associated with conventional mortgages. At the time of this writing, the FHA Mortgage loan limit in most counties throughout the country is $314,827 for single family homes. That amount is more for 2-4 unit properties, and in designated high-cost counties.
  • Appraisal and Property Requirements - FHA mortgages also have stricter appraisal guidelines. With an FHA mortgage the appraiser is required to look for deficiencies with the home to ensure it meets the minimum standards set by the Federal Housing Administration.  Chipping paint, missing handrails, and aging roofs are some of the more commonly seen issues that may be required to be fixed before the loan can close.
  • Student loan payments – FHA requires lenders to count 1% of the outstanding student loan debt as the monthly payment when factoring the debt-to-income ratio requirement. Even if you are on an income-based repayment plan. So while it does have more lenient guidelines overall, this rule can be a hindrance for some borrowers with significant student loan debt.

 

FHA Loan Process

The process for getting an FHA loan is very similar to getting a conventional loan or any other mortgage. For a more in-depth look, review our series on the steps to buying a house and review our complete home-buyers guide.

To obtain an FHA Mortgage, you will go through a few basic steps:

Step 1: Complete an application and then help the loan officer document the information in the application. You can apply for an FHA mortgage online or over the phone.  The loan officer will ask for proof of job history, income, assets, and credit history to make sure everything is in line with the guidelines set forth by the Federal Housing Administration. 

After the loan officer reviews the application and supporting documentation, they’ll issue a pre-approval. At that point you can begin searching for a home! 

Step 2: Once you have an accepted offer to buy a house, the real loan process begins. You’ll provide the loan officer with a copy of your contract, be asked to sign some disclosures and provide any missing documents required for initial underwriter review.

Once complete, the loan officer will order an appraisal, title work and submit all supporting documentation to the underwriter who will review the file compared to the FHA guidelines.

After the initial review, the underwriter will likely ask for additional items and collect any further necessary documentation to make sure that the applicant, contract, home and loan parameters are all in accordance with the FHA guides. 

Step 3: Once all conditions have been satisfied, the underwriter will approve the loan. This process takes about 20-25 days from the time you get under contract. Once loan approval has been reached, the lender will work with the title company to finalize a settlement statement and closing documents for the closing. 

Once the settlement statement and closing documents are prepared the applicant will sign all the final documentation and the title company will transfer title and record any necessary documents with the county in which the home exists and then you can take possession of your new home!

 

Who Can Qualify

The FHA Mortgage program is available to US Citizens, Residents and certain Non-Residents.

Applicants can qualify for an FHA loan with a lower credit score and higher debt to income ratios than with traditional conventional loans.   

To get an FHA mortgage the home must be your primary residence.  FHA allows for family members to co-sign as non-occupying co-borrowers to help people qualify.  

 

FHA Credit Requirements

FHA is more lenient on credit requirements and at United Fidelity Funding, we can routinely get a loan done for customers with sub 580 credit scores. 

Please note: If you have a sub 580 credit score it would require a 10% down payment, and in some instances 20% may be necessary. 

FHA loans are beneficial for borrowers with fair to average credit scores.  A borrower with a score in the 600s will get a much better rate using FHA for their mortgage than a conventional loan.

For major derogatory credit events such as a bankruptcy or foreclosure, FHA has a shorter seasoning period for those events. 

 

FHA Property Requirements

FHA will lend on most types of homes as long as there are comparable properties that have recently sold similar to the home you’re buying. 

List of eligible properties would include:

  • Single Family Home, detached
  • Townhome
  • 2-4 unit multi-family homes
  • Condo – assuming it’s on the HUD approved list
  • Modular Home
  • Manufactured home – assuming it meets the HUD permanent foundation guidelines and was built after June 15, 1976.

FHA generally wants a property that is in good condition and have some guidelines along those lines. They define this as a property that doesn’t have any obvious safety concerns or would require undue costs associated with repairing the home after purchase. A few common issues often seen on FHA appraisals are:

  • Peeling paint or wood rot on the exterior of the home
  • Having hand rails on all stair cases and decks over 30 inches off the ground
  • Roofs that have less than a few years of life left
  • Dilapidated out buildings located on the property
  • Exterior outlets that are uncovered or not weatherized

If the appraiser finds any issues with the home, you will often be able to negotiate with the seller to fix the items. All issues the appraiser notates on their report do have to be fixed before the lender can close on the mortgage.

Summary:

The FHA Mortgage is the 2nd most common home loan in America. It’s one of the top first-time home buyer options, and ideally suited for borrowers with a smaller down payment, fair to good credit and/or somebody with higher debt-to-income ratios.

The rates on an FHA mortgage are often significantly lower than Conventional loans, and can also offer a cheaper mortgage insurance premium, therefore making the FHA Mortgage a cheaper solution for a lot of buyers in the country.

 


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