Last Updated on November 8, 2020
This page provides detailed information on how to access FHA loans. Here, you will be walked through what FHA loans are, how to get them, requirements to access FHA loans, the application process, and all other important information you might need to know about FHA loans. Please stay tuned.
Table of Contents
What Is a FHA Loan?
A Federal Housing Administration (FHA) loan is a mortgage that is insured by the Federal Housing Administration (FHA) and issued by an FHA approved lender. FHA loans are for low and middle income borrowers; they require a lower minimum down payment and lower credit scores than many conventional loans.
You can now borrow up to 96.5% of the value of your home with an FHA loan. This means that you need to make an initial payment of 3.5%. You need a credit score of at least 580 to qualify. If your credit score falls between 500 and 579, you can still get an FHA loan if you pay a 10% down payment.
With FHA loans, your down payment can come from savings, a financial gift from a family member, or a grant for down-payment assistance. Because of their many benefits, FHA loans are popular with first-time homebuyers.
It’s important to note that with an FHA loan, the FHA doesn’t actually lend you money for a mortgage. Instead, you get a loan from an FHA-approved lender, like a bank or another financial institution. However, the FHA guarantees the loan. Some people refer to it as an FHA insured loan, for that reason.
In order to secure the guarantee of the FHA, borrowers that qualify for an FHA loan are also required to purchase mortgage insurance, and premium payments are made to FHA. Your lender bears less risk because the FHA will pay a claim to the lender if you default on the loan.
Types of FHA Loans
The FHA offers a variety of loan options.
1. Home Equity Conversion Mortgage (HECM)
This is a reverse mortgage program that helps seniors aged 62 and older convert the equity in their homes to cash while retaining title to the home. You choose how to withdraw the funds, either as a fixed monthly amount or a line of credit (or a combination of both).
2. FHA 203(k) Improvement Loan
This loan factors in the cost of certain repairs and renovations into the loan. This one loan allows you to borrow money for both home purchase and home improvements, which can make a big difference if you don’t have a lot of cash on hand after making a down payment.
3. FHA Energy Efficient Mortgage
This program is a similar concept to the FHA 203(k) Improvement Loan program, but it’s aimed at upgrades that can lower your utility bills, such as new insulation or the installation of new solar or wind energy systems. The idea is that energy-efficient homes have lower operating costs, which lower bills and make more income available for mortgage payments.
4. Section 245(a) Loan
This is a program for borrowers who expect their incomes to increase. Under the Section 245(a) program, the Graduated Payment Mortgage starts with lower initial monthly payments that gradually increase over time, and the Growing Equity Mortgage has scheduled increases in monthly principal payments that result in shorter loan terms.
How to Access FHA Loans: Eligibility and Requirements
You’ll need to satisfy a number of requirements to qualify for an FHA loan. It’s important to note that these are the FHA’s minimum requirements and lenders may have additional stipulations. To make sure you get the best FHA mortgage rate and loan terms, shop more than one FHA-approved lender and compare offers.
You will need to fulfill a number of requirements to be eligible for an FHA loan. It is important to note that these are the minimum requirements of the FHA and that lenders may have additional stipulations. To make sure you get the best FHA mortgage rates and loan terms, buy more than one FHA approved lender and compare offers.
Credit score
The minimum credit score for an FHA loan is 500. If your score falls between 500 and 579, you can still qualify for an FHA loan, but you’ll need to make a larger down payment. Again, these are FHA guidelines — individual lenders can opt to require a higher minimum credit score.
Down Payment Funds
If you’ve got a credit score of 580 or higher, your FHA down payment can be as low as 3.5%. A credit score that’s between 500 and 579 means you’ll have to plunk down 10% of the purchase price.
It doesn’t all have to come from savings. You can use gift money for your FHA down payment, so long as the donor provides a letter with their contact information, their relationship to you, the amount of the gift and a statement that no repayment is expected.
Debt-to-income Ratio (DTI)
The FHA requires a DTI of less than 50, meaning that your total monthly debt payments can’t be more than 50% of your pretax income. This includes debts that you aren’t actively paying.
For student loans in deferment, your FHA loan underwriter will include 1% of the loan’s total as the monthly payment amount. For other types of loans that you aren’t currently repaying, underwriters will use 5% of the loan’s total to calculate your DTI.
Property Approval
The property you’re trying to buy with an FHA loan, whether it’s a house, a condo, a manufactured home or a multifamily home, has to meet FHA minimum property requirements.
The FHA requires an appraisal that’s separate and different from a home inspection. They want to be sure the home is a good investment in other words, worth what you’re paying for it and ensure that it meets basic safety and livability standards.
For an FHA 203(k) loan, the property may undergo two separate appraisals: An “as is” appraisal that assesses its current state, and an “after improved” appraisal estimating the value once the work is completed.
Mortgage Insurance
FHA mortgage insurance is built into every loan. When you get an FHA mortgage, you’ll make an upfront mortgage insurance payment (which can be rolled into the total amount of the loan), and make monthly payments thereafter.
If you start with a down payment of less than 10%, you’ll continue to pay mortgage insurance for the life of the loan. Those with 10% down payments will pay FHA mortgage insurance for 11 years.
RELATED: A Complete Beginners Guide to Finding the Best Personal Loans for Bad Credit
How to Apply For an FHA Loan?
To apply for an FHA loan, you will required of your personal and financial documents, including but not limited to:
- A valid Social Security number.
- Proof of U.S. citizenship, legal permanent residency or eligibility to work in the U.S.
- Bank statements for, at a minimum, the last 30 days. You’ll also need to provide documentation for any deposits made during that time (usually pay stubs).
Your lender may be able to automatically retrieve some required documentation, like credit reports, tax returns and employment records. Special circumstances like if you’re a student, or you don’t have a credit score may require additional paperwork.
If you believe you are eligible for an FHA loan and are ready to apply, the first step is to get pre-approval from your chosen lender.
This could be your local bank or credit union, an independent mortgage broker, or any number of national online mortgage lenders.
Don’t be afraid to start the process with one or two lenders and get a quote for rates, fees and charges. Even with an FHA loan, the mortgage business is competitive and the difference in rates or closing costs can save you thousands.
FHA Loan Limits
No matter what type of FHA loan you are looking for, there will be limits on the mortgage amount. These limits vary by county. FHA loan limits range from $ 331,760 to $ 765,600.
The upper limit for FHA loans on single family homes in low cost counties is $ 331,760. One example is Lucas County, Ohio, where Toledo is located. The upper limit for FHA loans in the more expensive counties is $ 765,600 – San Francisco County, California, for example.
Some counties have housing prices that fall somewhere in between, so the FHA loan limits are also in the middle. One example is Denver County, Colorado, where the FHA loan limit is $ 575,000.
What Are the Pros and Cons of FHA Loans?
FHA loans have many benefits that make them a great option for borrowers, but there are downsides, too. Let’s take a look at them;
Benefits of FHA loans
- Lower minimum credit scores than conventional loans.
- Down payments as low as 3.5%.
- Debt-to-income ratios as high as 50% allowed.
Disadvantages of FHA loans
- FHA mortgage insurance lasts the full term of the loan with a down payment of less than 10%.
- Property must meet strict health and safety standards.
- The loan amount cannot exceed the conforming limit for the area.
Even though the FHA sets standard requirements, FHA-approved lenders’ requirements may be different.
FHA interest rates and fees also vary by lender, so it’s important to comparison shop. Getting a mortgage preapproval from more than one lender can help you compare the total cost of the loan.
What Are the Differences Between an FHA Loan and a Conventional Loan?
It is easier to qualify for an FHA loan than a conventional loan, which is a mortgage that is not insured or guaranteed by the federal government.
- FHA loans allow for lower credit scores than conventional loans and, in some cases, lower monthly mortgage insurance payments.
- FHA rules are more liberal regarding gifts of down payment money from family, employers or charitable organizations.
- FHA loans may involve closing costs that aren’t required by conventional loans.
Frequently Asked Questions about FHA Loans
Who Can Qualify for an FHA Mortgage?
To qualify for an FHA loan, you’ll need to meet FHA requirements, including an acceptable credit score (the minimum varies based on the amount of your down payment) and a debt-to-income ratio of less than 50%.
What Credit Score Do I Need for an FHA Loan?
FHA guidelines set a minimum credit score of 500 for borrowers making down payments of at least 10%, and 580 for a down payment between 3.5% and 10%. However, lenders often require higher credit scores to qualify for FHA loans. If your credit score could use work, consider ways to build your credit.
Conclusion
While an FHA loan might sound great, it’s not for everyone. It won’t help those with a credit score below 500. For those with bad credit, a personal loan may be a better option to consider. In contrast, aspiring homeowners who can afford a large down payment may be better off with a conventional mortgage. They are more likely to be able to save more money in the long run thanks to the lower interest rates and mortgage insurance premiums offered by conventional lenders.
Before applying for a loan, make sure you understand what you are spending your money on and how much you really need. Try not to borrow more than you can repay, and make sure you can handle monthly payments along with your other obligations.
Remember to compare lenders to find the best FHA loans for you. Look at several lenders and compare interest rates, origination fees, and other terms. Take a close look at the situation so you can choose the loan that will work best for you.
Do you have any queries on how to access FHA loans? Please feel free to let us know so we can assist you with any information you will need.
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