What is an FHA Loan?

An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). This governmental agency was formed in 1934 after the banking crisis that happened during the Great Depression. Many homes were foreclosed and there was a drastic decrease in home ownership.

The FHA is part of the Department of Housing and Urban Development (HUD) and was established in response to the housing market in the 1930s. The FHA continues to strive to improve housing standards and conditions, stabilize the housing market, promote home ownership, and provide home financing through the insurance of mortgage loans.

FHA loans or FHA mortgages are issued by approved lenders. The government doesn’t loan money, but it does insure these loans which means it will reimburse the lender for any loans on which the borrower defaults. FHA loans are less risky for lenders who underwrite, approve and fund FHA loans because they are insured by the FHA. Lenders in turn offer better terms and lower interest rates than conventional loans.

FHA loan lending limits in Florida vary based on a variety of housing types and the cost of local housing. Here in Brevard County, the lending limits for 2019 are as follows:

 

Single Family

Duplex

Tri-plex

Four-plex

$314,827

$403,125

$487,250

$605,525

 

An FHA loan is one of the most popular among first-time home buyers because of the low down payment and less strict credit score requirement. FHA loans are one of easiest types of mortgage loans to qualify for because borrowers can qualify with credit scores as low as 500. Home buyers can purchase a home for as little as 3.5 percent down with a credit score of 580 or higher. If a borrower has a credit score between 500 and 579 they may still qualify for an FHA loan, however they are required to put 10 percent down. It’s important to remember that the lower the credit score, the higher the interest rate will be.

Credit score and down payment are not the only requirements to obtain an FHA loan. Check out a list of FHA loan requirements below:

 

FHA Loan Requirements

·         Valid Social Security Number.

·         Steady employment history or worked for the same employer for the past 2 years.

·         Loan must be for a primary residence. Buyer must live in it the majority of the year.

·         Property must be appraised from an FHA-approved appraiser.

·         The property must meet certain minimum standards at appraisal. If the home doesn’t meet these standards the seller must complete the required repairs. If the seller won’t do the repairs, the buyer is required to pay for the repairs at closing to be held in escrow until the repairs are completed.

·         Borrowers’ front-end ratio needs to be less than 31 percent of their gross income, however sometimes lenders can justify up to 40 percent if they believe the mortgage presents acceptable risk. Front-end ratio is mortgage payment plus HOA fees, property taxes, mortgage insurance and homeowners insurance.

·         The back-end ratio typically needs to be less than 43 percent of the borrowers’ gross income. Sometimes you can get approved up to 50 percent. Back-end ratio is the mortgage plus all your monthly debt such as student loans, car payment, and credit card payments.

·         Borrowers must be two years out of bankruptcy and have re-established good credit.

·         Borrowers must be three years out of foreclosure and have re-established good credit.

·         Borrowers must have a minimum credit score of 500-579 for a minimum down payment of 10 percent.

·         Borrowers must have a minimum credit score of 580 with a minimum down payment of 3.5 percent and maximum financing.

·         Mortgage insurance is required for FHA loans.

 

What mortgage insurance is required for FHA loans?

 Regardless of your credit score, FHA loans require two types of mortgage insurance. One is paid upfront and the other is a monthly fee.

Upfront mortgage insurance premium is a one-time upfront monthly premium of 1.75 percent. This sum can be paid at closing as part of the settlement charges or can be rolled into the mortgage payment.  

Annual mortgage insurance premium (charged monthly) is a percentage of the loan amount (usually between .45 and .85 percent) and calculated from the loan-to-value (LTV) ratio, the loan size and length of the loan. Borrowers will have to pay mortgage insurance for the entire length of the loan if they put less than 10 percent down (their LTV is greater than 90 percent at the time the loan was originated). If they put 10 percent or more down (the LTV is less than 90 percent) the borrower will pay mortgage insurance for 11 years.

Many people refinance their FHA loan into a conventional mortgage once they have enough equity in their home in order to remove the cost of mortgage insurance sooner.

 

Are FHA loans only for first-time home buyers?

FHA loans are a popular and affordable option among first-time home buyers due to their low down payment requirements, flexible credit underwriting methods, and competitive interest rates. However, the FHA is not only limited to first-time home buyers. FHA loans can be used by all home buyers who qualify to purchase or refinance their home.

 

What are the benefits of FHA loans?

 

·         Low down payment. FHA loans require as little as 3.5 percent down payment for maximum financing.

·         Easier to qualify. Since the FHA insures the mortgage, lenders are more likely to give loans to borrowers with less than perfect credit. Borrowers with credit scores as low as 580 can qualify for 3.5 percent down payment. Credit scores of 500-579 may qualify for 10 percent down payment. If you have undergone a bankruptcy or foreclosure you still may be able to qualify for an FHA loan. You just need to be two years post-bankruptcy or three years post-foreclosure and re-established credit. 

·         Down payment assistance or gift. The down payment does not have to come from your own pocket, which can greatly reduce your up-front expenses. Borrowers are allowed to receive funds gifted from family members or friends for their down payment. You just need a letter from the donor stating that they do not want you to pay them back. Home buyers can also use assistance programs such as grants to pay for the down payment.

·         Closing costs. The seller is allowed to pay up to 6% of the purchase price toward closing costs and incentives.

·        Better rates. Because FHA loans are backed by the federal government, they're more likely to offer better rates than commercial lenders.

      More security. Created in 1934, the FHA is long established and not going away. If lenders encounter problems the FHA offers options to help avoid foreclosure. 

 

What are home buyers next steps if interested in an FHA loan?

 

·         Talk to a lender and see how much you qualify for.

·         Create a budget and see what monthly payments you can afford.

·         Clean up any problems on your credit report.

·         Save enough for at least 3.5 percent down.

       Get with a Realtor and start looking at properties.