All about the the FHA
Started in 1934, the Federal Housing Administration (FHA) is a government agency that aims to help more Americans access home ownership. They do this by insuring mortgage loans made by other lenders, easing their risk and therefore allowing for a wider range of people to qualify.
The FHA officially became part of the Department of Housing and Urban Development’s Office of Housing (HUD) in 1965, but still helps hundreds of thousands of borrowers purchase a home or refinance their existing home, offering the benefit of great low rates, low down payments, reduced closing costs, and flexibility when qualifying.
The FHA allows less-than-perfect credit scores
If your credit score is below average, you’ve likely heard a lot of “no’s” when looking to qualify for a home loan. But FHA loans are the best option for borrowers with substandard credit. In fact, most borrowers need only a 580 credit score or higher to qualify for a loan with a 3.5% down payment, and those who put 10% down might qualify with a score of only 500!
How low can you go?
While borrowers with credit scores below 500 are typically ineligible for FHA loans, believe it or not, the FHA may make exceptions for certain applicants under special conditions. Those with nontraditional credit histories, insufficient credit, or even bankruptcies may actually qualify for a FHA loan with a sub-500 score with other redeeming factors!
FHA’s minimum down payment is 3.5%
One of the great benefits of a FHA loan is that you don’t generally have to put 20% or even 10% down for a down payment on a home purchase. In fact, FHA traditionally has specialized in home loans with only 3.5% down payments, which makes it far easier for the average person to buy a home, which comes to only $7,500 for a $250,000 home purchase.
Borrowers can use funds for down payments from a variety of sources
With conventional loans, the funds used for a down payment are carefully scrutinized, and have to have come from income or savings and been in the bank a certain period. But FHA loans offer greater flexibility, as borrowers can use gifts from family members or grants from government down-payment assistance programs to make their down payment, which helps even more people access the dream of home ownership.
Even closing costs can be covered
Like down payment funds, conventional lenders carefully restrict the source of money used for closing costs. But when applying for a FHA loan, borrowers can ask home sellers, builders and lenders to pay some of the buyer’s closing costs. These costs include the appraisal, credit report, or title and escrow fees, as well as other expenses. This gives the buyer even more options to reduce the total cash they need to bring in to close.
What kind of properties can you purchase with FHA loans?
FHA loans allow borrowers to purchase single family homes, but also condominiums, townhomes, halfplexes, duplexes, tri-plexes, and four-plexes, and even mobile and manufactured homes. FHA loans also allow for new construction.
You can borrow cash for repairs
FHA loans are great for “fixer upper” properties and homes that need significant repairs before being move-in ready. In fact, the FHA offers a special rehab loan called a “streamlined” 203(k) that lends based on the projected value of the home after the repairs are done, and grants the borrower the cash needed (up to $35,000 in most cases) to make those fixes when the loan closes.
FHA’s insurance costs
All FHA loans require two mortgage insurance premiums:
The upfront premium is paid when the borrower first gets the loan, as comes to 1.75% of the loan amount — $1,750 for a $100,000 loan (but it can be financed as part of the loan amount.)
The second is the annual premium, which is paid monthly with the mortgage payment. The annual premium is based on the length of the loan, the amount borrowed and the initial LTV, or loan-to-value ratio. For 30-year loans with less than 5% down payments, the annual premium comes to 1.35% of the loan.
Limits and restrictions to FHA loans
Since the FHA is not a lender but a government insurer of mortgage loans, borrowers need get their loan through an FHA-approved lender. Since there are a wide variety of banks, lenders, and other financial institutions to choose from, all with different interest rates and terms, we can help you navigate and find the best one since we’re mortgage brokers.
Appraisers also need to be on the FHA approved list, and there is heavier scrutiny and restriction for items that need to be repaired when taking out a FHA loan.
Just like conventional loans, there are limits to the amount of loans the FHA will fund. The FHA calculates loan limits annually by using a value worth 115% of the median home price in each area, with a hard ceiling of $625,500.
FHA loans are not used to fund rental properties, investment properties, or vacation homes.
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Rates are great for FHA loans now, so contact us for more information!