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What is an FHA Loan?
An FHA loan is a government-backed home loan guaranteed by The Federal Housing Administration that allows lenders to lower their borrower requirements, making it easier to qualify for than a traditional mortgage. Borrowers with a 580 credit score can be approved with just a 3.5% down payment.
FHA Loan Requirements
- 580 credit score
- 3.5% down payment
- 43% max DTI ratio
- Available for primary residences only
- Two years of stable employment and income history
- Two year waiting period after a bankruptcy/foreclosure
FHA Loan Benefits
- Minimum 580 credit score
- 3.5% down payment
- Low interest rates
- Up to 50% debt-to-income ratio
- Down payment assistance available
- Closing costs can be rolled into the loan
Down Payment and Credit Guidelines
FHA loans require a 3.5% down payment which needs to come from your savings or retirement account or can be a gift from a friend or family member.
- Down Payment Assistance Programs – There are several programs available for first-time homebuyers that provide financial assistance that can be used towards the down payment and/or closing costs.
- Down Payment Gifts – The FHA allows 100% of the down payment to be a gift from a friend or family member. If using gifted funds for the down payment you will need a down payment gift letter.
- Credit History – If you have no credit history, your lender will ask for alternative credit lines, such as rent and phone payments, to establish a positive payment history.
- Late Payments – A single late payment will not disqualify you; however, more than a single late payment in the last 12 months may prevent you from qualifying.
- Foreclosures – 36-month waiting period after a foreclosure, 12 months with extenuating circumstances.
- Bankruptcy – There is a 24-month waiting period after a chapter 7 bankruptcy, or 12 months if you have extenuating circumstances. You must reestablish positive payment history since your bankruptcy was filed.
- Collections, Judgements, and Federal Debt – A lender must verify that judgments and Federal debt has been paid or on a payment plan.
Income and Employment
- Debt-to-Income Ratio – 43% to 50% maximum DTI ratio depending on the borrower. Your debt-to-income ratio (DTI) is the amount of your monthly income that goes towards reoccurring monthly payments such as auto loans and credit card payments.
- Employment and Income – 2+ years of stable employment with W2s and Tax Returns. Self-employed and commission employees will have income averaged over the last two years.
- Assets – Borrowers should have enough money in savings to cover the down payment, closing costs, the home appraisal and inspection, and at least two months’ worth of mortgage payments in reserve funds.
- Closing Costs – Closing costs are fees charged by mortgage lenders for processing and funding a loan. They include origination fees, home appraisals, title insurance, and more. Typically, FHA closing costs are between 2% to 5% of the purchase price.
2022 FHA Loan Limits
The FHA loan limit is the maximum amount you can borrow. The limits were recently increased to $420,680, a $65,000 increase from 2021. The FHA loan limit in high-cost areas is $970,800.
FHA Property Requirements
FHA loans are available for several different types of homes. Single-family and multi-family homes are eligible. Condos and townhomes need to be FHA approved to be eligible.
Eligible Property Types
- Single-family homes
- 2-4 unit multifamily properties
- Manufactured and mobile homes
- Condos and Townhomes
Minimum Property Standards
FHA loans have stricter property requirements than conventional mortgages. The home must be in good condition and not in need of any upgrades or repairs. All properties must meet the minimum FHA property standards to be eligible.
- Must be accessible – The property should have public access and not require trespassing on private property to enter.
- Safe access – The home should be safe to access from a public road.
- Free from hazards – The property should be free from any hazards such as lead-based paint, visible electrical wiring, etc.
The Home Inspection and Appraisal
The FHA home appraisal is required before closing to determine the market value of the property. Depending on the size of the house, the average appraisal cost is $300 to $600. Inspections are done before closing to ensure the home meets minimum property requirements and costs $250 to $400 on average.
FHA Mortgage Insurance
Unlike conventional mortgages which do not require mortgage insurance with a 20% down payment, mortgage insurance is required on FHA loans regardless of the down payment. When the loan-to-value ratio reaches 78% you can refinance out of your FHA mortgage to a conventional mortgage to drop the mortgage insurance premium.
- Upfront Mortgage Insurance Premium – FHA loans require an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount. Upfront insurance can be financed into the loan.
- Annual FHA Mortgage Insurance Premium (MIP) – The mortgage insurance rate depends on the length of the loan term, loan amount, and the down payment. For most borrowers, the rate will be 0.85% of the loan amount. Check current FHA mortgage insurance rates
FHA vs. Conventional Loans
There are several key differences between FHA and conventional loans, the main difference being higher down payment and credit score requirements making them more difficult to qualify for than FHA loans. However, since they do not require mortgage insurance with a loan-to-value ratio below 80% so if you have at least a 20% down payment a conventional loan is likely a better option.
Credit Score Requirement
Upfront Insurance Premium
Pros and Cons
Types of FHA Loans
- FHA Purchase – FHA loans allow you to get a mortgage with a competitive interest rate and a low down payment of just 3.5%.
- FHA Streamline Refinance – If you currently have an FHA loan you can quickly and easily refinance your loan to get a lower rate and monthly payment with a streamline refinance with less paperwork.
- FHA Cash-Out Refinance – Homeowners with significant equity in their home can convert their equity into cash with an FHA cash-out refinance. Borrow up to 80% of the market value of your home and have just one monthly mortgage payment.
- FHA 203k Loan – If you would like to purchase a home and get additional money to make repairs or renovations, you can with the FHA 203k loan program. This renovation loan will allow you to purchase a property and get up to $35,000 additional cash to make renovations or repairs.
- Energy-Efficient Mortgage (EEM) – The FHA Energy Efficient Mortgage Program is available to borrowers purchasing an energy-efficient home. An EEM can also be used to make energy-efficient upgrades to an older home.
- Home Equity Conversion Mortgage (HECM) – The HECM is a reverse mortgage program that aims to help seniors aged 62+ convert equity in their home to cash while staying in the home.
- Section 245(a) Loan – A mortgage program for recent college graduates who expect their income to increase. Section 245(a) loans start with lower monthly payments that increase over time.
FHA Loan Alternatives
FHA loans are great, but they aren’t perfect for everyone. Luckily it’s not the only low down payment home loan available.
- Conventional 97 Loans – Fannie Mae and Freddie Mac created the Conventional 97 loan program, which requires just a 3% down payment. They are more difficult to qualify for, requiring a 680 credit score.
- HomeReady and Home Possible Loans – Fannie Mae and Freddie Mac created the HomeReady and Home Possible loan program to compete with low down payment home loans. With just 3% down and a minimum credit score of 620, you may be eligible. Income limits apply.
- Conventional Loans – A conventional mortgage requires a 620 credit score and a down payment of 5%-20%. No PMI is required with a 20% down payment.
- VA Loans – Veterans of the U.S. military are eligible for a VA loan, which requires no down payment or mortgage insurance.
- USDA Loans – USDA loans are for low-to-median income homebuyers in rural parts of the country. They don’t require a down payment and have the lowest mortgage insurance rate of any home loan at just .35%.
Frequently Asked Questions
Is an FHA loan easy to get?
FHA loans are easier to qualify for than traditional conventional home loans because they have lower credit score and down payment requirements. While conventional loans require a 620 credit score with at least 5% down, FHA loans are available to borrowers with a 580 credit score and just a 3.5% down payment.
Is PMI required for FHA loans?
Because FHA loans are guaranteed by the government, but private mortgage insurance companies it is called MIP, mortgage insurance premium. It is required on FHA loans and can only be removed by refinancing out of an FHA loan.
How do I qualify for an FHA loan?
To qualify, you need a 500 credit score with a 10% down payment or a 580 credit score with 3.5% down—two years of stable employment and proof of income with two years of W2s and tax returns. See if you qualify by applying with an FHA-approved lender.
What is the downside of an FHA loan?
FHA loans have lower loan limits than conventional loans. They also require mortgage insurance regardless of the amount you use as a down payment.
Do FHA loans have income limits?
FHA loans do not have income limits. Your debt-to-income ratio determines the loan amount you qualify for, up to the FHA loan limit in your area.
Do FHA loans take longer to close?
The average time to close for most mortgage loans, including FHA, is 46 days. However, the time to close depends on several factors. You can speed up the process by getting all of your documents to your loan officer quickly and promptly responding to any requests.
Are FHA loans only for first-time homebuyers?
No. Anyone can qualify for an FHA mortgage regardless if they’re a first-time buyer or not. You can not have two FHA loans opened at the same time unless you met certain conditions.
Which is a better loan FHA or conventional?
If your credit score is below 620 and you have less than a 20% down payment, then an FHA mortgage will make the most sense. However, if you have great credit and 20% down, then a conventional loan is a better option because you can avoid mortgage insurance.
How do I apply for an FHA loan?
FHA loans are offered by private mortgage lenders and banks that are FHA-approved. The first step is to contact an FHA-approved lender to get pre-approved.
The Bottom Line
FHA loans are a great option for anyone looking for a low down payment mortgage option that is easier to qualify for than a traditional mortgage.
If you have at least a 580 credit score then you can qualify with just a 3.5% down payment.
Are you ready to get apply for an FHA loan?