FHA Home loans

An FHA loan is a mortgage backed by the Federal Housing Administration.
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What is an FHA loan?

An FHA loan is a mortgage insured by the Federal Housing Administration. Most FHA lenders allow the minimum 3.5% down payment. Typically lenders require a FICO score of 580 or higher, although post-Covid-19, some can require a score substantially higher than 580. The FHA insures mortgages underwritten by lenders, like banks, credit unions, and non-bank mortgage lenders. Mortgage Brokers also offer other lenders’ FHA products and can shop for the best lender for your particular situation.

FHA loans come with mortgage insurance that protects lenders in case of default. Because of this insurance, FHA lenders are willing to offer favorable terms to borrowers who might not otherwise qualify for a home loan.

There are many variations of an FHA home loan. They can be used to buy or refinance single-family homes, two- to four-unit multifamily homes, certain FHA approved condominiums, and many manufactured and mobile homes. There are even FHA loans that can be used for new construction (rare), or for renovating an existing home.

What is the FHA?

The Federal Housing Administration — better known as the FHA, was created as part of the National Housing Act of 1934. Initially it established the 20% down payment, before evolving to the current 3.5% requirement. Currently, the FHA insures loans for millions of single-family homes.

What's the difference between an FHA and Conventional Loan?
It’s easier to qualify for an FHA loan than a conventional loan, which is a mortgage that isn’t insured or guaranteed by the federal government. FHA loans can allow for lower credit scores than conventional loans. If you have a lower FICO score, an FHA loan can have lower private mortgage insurance monthly payments. In general, FHA rules can be easier to meet, regarding gifts of down payment money from family, employers or charitable organizations. FHA loans currently have an up front mortgage insurance charge that is capitalized into the loan at closing. Conventional loans do not typically have this fee. Therefore, an FHA loan can be more expensive, and you should analyze the pros and cons of both. Working with a licensed mortgage broker, who helps you analyze the total costs of the different programs, can be a good idea.
What are the types of FHA loans?
The FHA offers a variety of loan options, from a fairly standard purchase loan, the 203(b) to more complicated construction loans, the 203k and CP (construction to permanent).
FHA loan limits

FHA places loan limits on the mortgage amount. These limits vary by county. FHA loan limits in 2020 range from $331,760 to $765,600.
The upper limit for FHA loans on single-family homes in low-cost counties is $331,760. An example is Oakland County, Michigan, where Rochester is located. The upper limit for FHA loans in the highest-cost counties is $765,600 — New York, NY would be an example. In Michigan, the limit is $331,760 for the entire state.

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 requirements, called “overlays”. To make sure you get the best rate and loan terms, have an experienced mortgage broker shop more than one FHA-approved lender and compare offers.

Credit score

The minimum credit score for an FHA loan is 500, but very few lenders offer FHA mortgage loans with scores below a 580. Again, these are FHA guidelines — individual lenders can opt to require a higher minimum credit score, and post Covid-19 most are.

Down payment funds

If you’ve got a credit score of 580 or higher, FHA down payment can be as low as 3.5%. Even better yet,  it doesn’t all have to come from your savings. You can use gift money for your FHA down payment. Your loan officer can guide you on the paperwork requirements.

Debt-to-income ratio (DTI)

The FHA typically requires a debt to income of less than fifty, meaning that your total monthly debt payments can’t be more than 50% of your pretax gross income. This includes debts that you are not currently paying, including student loans. For student loans in deferment or forbearance, your FHA loan underwriter will include 1% of the loan’s total outstanding balance as the monthly payment amount. For other types of loans that you aren’t currently repaying, underwriters will often use 5% of the loan’s total to calculate your DTI.

Property Appraisal

FHA loans, whether it’s a house, a condo, a manufactured home or a multifamily home, have to meet minimum FHA property requirements. The FHA requires an appraisal that’s in addition to home inspection. A certified FHA appraiser will make a determination that the home is worth what you’re paying for it (the contract price) — and ensure that it meets basic safety and livability standards.

Mortgage insurance

FHA mortgage insurance is built into every loan. When you get an FHA mortgage, you’ll make a lump; sum mortgage insurance payment (which is typically rolled into the total amount of the loan), and make monthly payments thereafter. If you have a down payment of less than 10%, you’ll pay mortgage insurance for the life of the loan. If you can make a 10% down payment, you will pay FHA mortgage insurance for 11 years.

What are the pros and cons of FHA loans?

If your credit score and monthly budget leave you without other choices, be aware that FHA loans can be considered more expensive than other home loans.

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Get Mortgage Guidance Ascend Mortgage Benefits Disadvantages 01
Benefits of FHA loans
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Lower minimum credit scores than conventional loans

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Down payments as low as 3.5%

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Debt-to-income ratios as high as 50% allowed

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More flexible on prior bankruptcies (2 years removed), and foreclosures (3 years removed

Get Mortgage Guidance Ascend Mortgage Benefits Disadvantages 02

Disadvantages of FHA loans

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FHA mortgage insurance never stops if you put less than 10% down

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There is an additional up front mortgage insurance charge conventional mortgages do not have

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Property must meet additional health and safety requirements

Even though the FHA sets standard requirements, FHA-approved lenders’ requirements may be different. Rates and fees also vary by lender, so it’s important to comparison shop with your mortgage broker.