Are you considering an FHA loan for your next home purchase? If so, you’re not alone. FHA loans are one of the most popular types of mortgages available today. But what exactly is an FHA loan? And what are the benefits of using one?
In this complete guide to FHA loans, we’ll answer all your questions and help you understand everything you need to know about FHA loans. We’ll cover topics such as: how to qualify for an FHA loan, the different types of FHA loans available, the costs associated with FHA loans, and more!
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Table of Contents
What Is an FHA Loan?
An FHA loan is a mortgage loan that’s insured by the Federal Housing Administration. FHA loans are available to all types of borrowers, not just first-time home buyers. And there are no minimum credit score requirements for FHA loans.
Who is Eligible for an FHA Loan?
Not everyone is eligible for an FHA loan. To qualify, you must:
- Be a legal U.S. resident
- Have a social security number
- Be of legal age to sign a mortgage (18+)
- Have steady employment history
In addition, you must also be looking to purchase a property that meets certain FHA standards. These standards include:
- The property must be your primary residence
- The property must be a single-family home, or an FHA approved condominium or townhome
- The property must be built after 1978
- The property must be in good condition, with no major repairs or renovations needed
Benefits of an FHA Loan
There are several reasons why FHA loans are popular with borrowers. Some of the main benefits include:
Low Down Payment Requirements: You can qualify for an FHA loan with as little as a three percent down payment. This is helpful if you don’t have the money for a large down payment.
Lenient Credit Score Requirements: You can qualify for an FHA loan even if you have less than perfect credit. This benefit gives FHA loans an edge over other types of mortgages.
More Flexible Income and Debt Requirements: There are more forgiving guidelines when it comes to your income and debt levels when you apply for an FHA loan. This means that more borrowers are likely to qualify for an FHA loan.
Lower Interest Rates: FHA loans typically have lower interest rates than other types of mortgages.
No Prepayment Penalties: FHA loans don’t have any prepayment penalties, which means you can pay off your loan early without penalty.
More Forgiving Foreclosure and Bankruptcy Guidelines: FHA loans offer more leniency than other mortgage types when it comes to past bankruptcies and foreclosures.
How to Qualify for an FHA Loan
In order to qualify for an FHA loan, there are a few basic requirements that you’ll need to meet. These include:
- You must be a U.S. citizen or permanent resident alien.
- You must have a valid Social Security number.
- You must be of legal age in your state to sign a contract.
- You must have a steady source of income.
- Your monthly housing costs (mortgage payment, property taxes, and insurance) must be less than 31% of your gross monthly income.
- Your total monthly debts (housing costs, plus any other recurring payments) must be less than 43% of your gross monthly income.
- You must have a good credit history.
- You must have enough saved for a down payment.
How to Apply for an FHA Loan (Step by Step Guide)
Now that you know the requirements for FHA loans, here’s a step by step guide on how to apply:
- Shop around for the best FHA loan. Many different lenders offer FHA loans, so it’s important to compare interest rates and terms.
- Gather your documentation. To apply for an FHA loan, you’ll need to provide some basic information and documents. This includes your Social Security number, employment history, proof of income, and recent bank statements.
- Complete an FHA loan application. You can apply for an FHA loan online, or by visiting a local bank or mortgage lender.
- After your application has been submitted, the lender will order a property appraisal to determine the value of the home you’re looking to purchase.
- Wait for a decision. FHA lenders usually take between two and four weeks to decide on your loan. If everything checks out, the lender will approve your loan and you’ll close on the property.
- Get your FHA loan. Once you’ve been approved, you’ll need to sign a loan contract and make any necessary down payment. Then you’ll get your FHA loan.
Types of FHA Loans
There are two main types of FHA loans available: fixed-rate FHA loans and adjustable-rate FHA loans. Here’s a quick overview of each:
Fixed-Rate FHA Loan
As the name suggests, this type of FHA loan has a fixed interest rate for the entire length of the loan term (usually 15 or 30 years).
Adjustable-Rate FHA Loan
This type of FHA loan has an adjustable interest rate, which means the interest rate can change over time. The initial interest rate is usually lower than a fixed rate FHA loan, but it may go up (or down) later on.
How to Qualify for an FHA Loan with Bad Credit
Even if you have bad credit, you may still be able to qualify for an FHA loan. But you’ll need to show that you’re able to make your monthly payments on time, and you’ll need a down payment of at least ten percent of the purchase price.
You may also be required to pay private mortgage insurance (PMI) if your down payment is less than 20%. This is because FHA loans are riskier for lenders, and they want to be sure that they’re protected in case you default on your loan.
Costs Associated with FHA Loans
There are several costs associated with FHA loans. This is something that you’ll need to factor into your budget before you decide whether or not an FHA loan is right for you. Some of the main costs include:
Mortgage insurance premiums (MIP): MIP is required for all FHA loans and protects the lender in case of default. MIP is paid upfront as well as annually, and the amount will depend on the loan terms, loan amount, and down payment.
Upfront FHA mortgage insurance premium (UFMIP): This is a one-time fee that you pay when you close on your FHA loan. It’s typically equal to two percent of the total loan amount.
Closing costs: These are costs associated with getting a mortgage, and they can include appraisal fees, title insurance, and origination fees.
FHA Loan Limits
FHA loans are available for both single-family homes and multifamily homes. The FHA loan limits will vary depending on the type of home you’re looking to purchase.
For a single-family home, the FHA loan limit will be different in each county. In 2019, the FHA loan limit for a single-family home was $314,815 in most counties across the United States, but it could be higher in some high-cost areas.
For a multifamily home, the FHA loan limit will depend on the number of units in the property. In 2019, the FHA loan limit for a two-unit property was $403,125, and it was $487,250 for a three-unit property.
FHA Loan Requirements
To qualify for an FHA loan, you’ll need to meet several requirements. These include:
- Your monthly mortgage payment (principal, interest, property taxes, and insurance) must be less than 31% of your gross monthly income.
- Your total monthly debts (housing costs, plus any other recurring payments) must be less than 43% of your gross monthly income.
- You must have a credit score of 580 or higher to qualify for the low down payment option of just three and a half percent. If you have a credit score of 500-579, you may still be able to qualify for an FHA loan, but you’ll need a minimum down payment of ten percent.
- You must be employed for at least two years in the same line of work.
- You must have a steady income and verifiable employment history.
- You must have a valid Social Security number, as well as being a U.S. citizen or legal resident alien.
- You must be of legal age to sign a mortgage in your state (18+ in most states).
- You must not have any delinquent FHA loans or have gone through a bankruptcy or foreclosure within the last three years.
- You must have a clear title to the property you’re looking to purchase (no outstanding liens).
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How To Cancel FHA Mortgage Insurance
If you have an FHA loan, you may be required to pay monthly mortgage insurance premiums. But what happens if you decide to sell your home or refinance? You may be able to cancel FHA mortgage insurance.
To do this, you’ll need to show that you’ve built up enough equity in your home (usually 22%). You’ll also need to have a good payment history and a low debt-to-income ratio.
If you meet these requirements, you can submit a request to cancel FHA mortgage insurance. Your lender will review your request and may approve it if you meet all of the requirements.
FHA Loans vs. Conventional Loans
There are a few key differences between FHA loans and conventional loans.
- FHA loans are available to borrowers with credit scores as low as 580, while most conventional lenders require a minimum credit score of 620.
- FHA loans have more flexible debt-to-income ratios than conventional loans. This means that you may be able to qualify for an FHA loan even if your monthly debts exceed 43% of your gross monthly income.
- FHA loans come with up-front and annual mortgage insurance premiums, while most conventional mortgages do not require mortgage insurance premiums.
Which is Right for You?
Both FHA loans and conventional loans have their pros and cons, so it’s important to weigh all your options before deciding which is right for you. An FHA loan may be a good option if you’re a first-time homebuyer with less than perfect credit, or if you need a smaller down payment.
A conventional loan may be a better choice if you have more money saved up for a down payment, or if you have strong credit scores.
No matter what type of mortgage you choose, make sure to work with a qualified lender who can help guide you through the process every step of the way.
Who Shouldn’t Get an FHA Loan?
There are a few cases where FHA loans may not be the best option. These include:
- If you have a large amount of outstanding debt, you may not be able to qualify for an FHA loan.
- If you’re looking to purchase a luxury home or investment property, you’ll likely need a conventional loan.
- If you’ve had any bankruptcies or foreclosures in the past three years, you won’t be eligible for an FHA loan.
- If your credit score is below 580, you’ll need to put down at least ten percent on an FHA loan (versus the three and a half percent required with a 580+ credit score).
- FHA loans come with mortgage insurance premiums, both up-front and annual. If you’re not planning on staying in your home for more than five years, FHA loans may not be the best option for you.
If you’re still not sure if an FHA loan is right for you, reach out to a qualified lender who can help you compare your options.
Conclusion
If you are considering an FHA loan, be sure to carefully weigh all of your options and consult with a trusted mortgage advisor. FHA loans can offer great benefits, but there are also some key things to keep in mind before applying.
To sum it up, here are the main pros and cons of FHA loans:
Pros:
- FHA loans are available to borrowers with less-than-perfect credit.
- FHA loans require a lower down payment than many other loan programs.
- FHA loans have more flexible underwriting guidelines than conventional mortgages.
Cons:
- FHA loans require both upfront and annual mortgage insurance premiums (MIP).
- FHA loan limits are lower than conventional loans in some areas.
- FHA loans may require repairs to the property before closing.
If you think an FHA loan is right for you, be sure to work with a mortgage advisor who can help you navigate the process and compare your options. Thanks for reading!
