Everything You Need to Know About FHA Loans
Written by: Kristy Welsh
Last Updated: August 14, 2017
In the wake of the housing bubble's collapse in 2008, FHA loans have taken on a renewed importance for today's mortgage borrowers. An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
Because of that insurance, lenders can offer FHA loans at attractive interest rates and with less stringent and more flexible qualification requirements.
Seven Facts About FHA Loans
1. Less Than Perfect Credit is OK - A borrower needed a credit score of 580 or better to qualify for a loan.
2. Minimum Down Payment is 3.5 Percent - This is a fraction of what a typical loan would require. Borrowers can use their own savings or a gift from a family member.
3. Closing Costs May Be Covered - FHA allows home sellers, builders and lenders to pay some of the borrower's closing costs.
4. Lender Must Be FHA Approved - Because FHA is not a "lender," but rather an insurance fund, borrowers need to get their loan through an FHA-approved lenders.
5. Borrower Must Carry Mortgage Insurance - There are two mortgage insurance premiums required by FHA: 1) an upfront premium of 1.75 percent of the loan amount and 2) an annual premium based on the length of the loan.
6. Extra Cash Can Be Available For Repairs - FHA has a special loan product for borrowers who need extra cash to make repairs on their home.
7. Relief Allowed for Financial Hardship - If a borrower has suffered a serious financial hardship, an FHA-insured loan can offer some type of temporary relief to help the borrower make their payments.
Who Can Benefit From an FHA Loan?
By serving as an umbrella under which lenders have the confidence to extend loans to those who may not meet conventional loan requirements, the FHA program allows individuals to qualify who may have been previously denied a home loan through conventional underwriting guidelines. FHA loans are designed for individuals who would like to purchase a home but may not have been able to save enough money for the purchase, such as recent college graduates, those still pursuing education, or a young couple starting out. It also allows individuals to qualify for a FHA loan whose credit has been marred by bankruptcy or foreclosure, as FICO (credit) scores can typically be lower than those for a conventional loan. At the current time, it is our understanding that the minimum FICO score for qualification for an FHA Loan is 580, but with extenuating circumstances variations to this limit may be possible — always discuss this with your mortgage professional.
Underwriting Guidelines for FHA Loans
Credit guidelines have been revamped for FHA loans as well as most other types of loans, and even the minimum FHA credit standards are harder to meet in the current market.
- A stable 2-year employment record is required.
- Monthly debt-to-income has to fall within certain parameters. Your monthly mortgage payment cannot be more than 29 percent of your gross monthly income.
- Money for the downpayment should be yours and in your account for at least 6 months, but gift money is allowable.
- FHA mortgage loan underwriting guidelines require property appraisal and it must appraise for at least the purchase price.
- If you've had a foreclosure, you need to have re-established credit and it must be over 3 years since the date of foreclosure.
- If you've had a bankruptcy, you need to wait 2 years and have clean credit.
- The applicant cannot have any outstanding civil judgements or delinquencies on federal debts such as taxes or student loans.
Different Types of FHA Loans Available
- FHA fixed-rate mortgages, or Section 203(b) loans, are the most common and popular type of FHA mortgage. The interest rate does not change with a fixed-rate mortgage. A fixed-rate FHA mortgage insures the lender for the total amount of the mortgage in case the buyer defaults. Fixed-rate mortgages can be taken out for periods of 10, 15, 20, or 30 years.
- The FHA Renovation Mortgage, or 203(k), allows homeowners to borrow money for the purpose of renovating their home. Up to 110 percent of the cost needed to repair and renovate a home can be financed under this program. There are, however, restrictions regarding the types of renovations that will be allowed, and the minimum amount of the 203(k) is $5000.
- FHA adjustable-rate mortgages, or Section 215, have interest rates that vary contingent on the current federal index. An adjustable-rate mortgage, or ARM, may be attractive under certain economic conditions as the interest rates are initially lower than interest rates on a fixed-rate mortgage. Typically, an ARM will be most beneficial to homebuyers who don't intend to stay in the home for more than a few years, as interest rates tend to increase over time.
- FHA Bridal Registry Program allows a married couple to "register" with a lender, much like the namesake department store bridal registry. Relatives or friends can make gift payments into an interest-bearing account in the couple's name, which can later be used as a down payment towards a FHA mortgage.
- Officer and Teacher Next Door Program. Typically, the homes which qualify for this program are located in areas of revitalization, or in moderately low-income neighborhoods that may have many vacant houses that have been identified as good candidates for redevelopment efforts. Through HUD and FHA, qualified teachers and law enforcement officers are able to purchase houses at a 50 percent discount and are required to make only a $100 down payment if the house is financed with a FHA mortgage.
FHA loans are available to anybody but are used most often by first-time home buyers and low- to moderate-income buyers. The decreased down payment and lack of set income limit qualifications makes this type of mortgage even more desirable for many people, particularly first-time homebuyers and those with blemished credit. For more information, visit the HUD website at http://www.hud.gov/.