If you want to buy a home and you don’t have 20% down or great credit. No problem! FHA is the way!
With as low 580 credit score requirement and just a 3.5% down payment, FHA mortgages are the easiest type of mortgage loan to qualify for in the mortgage marketplace.
FHA Loan Basics and History
A little history: The Federal Housing Administration (FHA) is a United States government agency created in part by the National Housing Act of 1934. The FHA sets standards for construction and underwriting and insures loans made by banks and other private lenders for home building. The goals of this organization are to improve housing standards and conditions, provide an adequate home financing system through insurance of mortgage loans, and to stabilize the mortgage market.
One of the main benefits of an FHA loan is that it will allow a “less than perfect” credit history and it has lower down payment requirements. This combination allows more homebuyers to qualify for home loans.
Costs of an FHA Mortgage
Borrowers are required to pay an up-front mortgage funding fee in the amount of 1.75% of the purchase price to HUD at closing. This UPFMIP can be added back into the loan (99.99% loans are done this way) or the fee may be paid at closing. FHA loans also require mortgage insurance paid (MIP) to HUD. In 2020 ,this amount usually around 0.85 percent of the loan amount annually. This monthly MIP is escrowed and is paid out of the monthly loan payments.
If a borrower defaults on an FHA mortgage, it is foreclosed on and HUD will pay the balance to the lender and take possession of the property.
FHA Down payment options& Credit Score Requirements
Many first time home buyers need lower down payment options and an FHA loan meets those needs. The FHA required down payment is only 3.5% with a credit score of 580+ The down payment can be saved or can obtained by a family/friend member as a gift as well.
FHA loans also have more flexible credit & debt ratio requirements than most mortgages.
If you don’t remember anything from this article, please remember, If you have a 580 or higher FICO score you willl only need a 3.5% down payment. Getting approved for an FHA mortgage with a 580+ score is much more likely than if your score is below 580.
However, getting approved for an FHA home loan with a credit score in the 500-579 range is difficult but not impossible. You will need work with an Alliance member to strengthen your application.
Click here to Request a free mortgage analysis from an Alliance member
2020 FHA Loan Requirements & Benefits
- 580+ FICO score requirement for borrowers with a 3.5% down payment
- 500-579 FICO score requirement with a 10% down payment
- Down payment can be a gift from a family member.
- You are allowed a non–occupant co-signer on the loan
- Higher debt-to-income ratios allowed than any other loan programs (56.9% in some cases)
- Must to prove income via 30 days’ paycheck stubs & last two years W2’s
- Must have two years of documented employment history. College can count for this requirement, if needed.
- More flexibility if you have filed bankruptcy or have a previous foreclosure in your past.
- You are required to occupy the home as a primary residence. FHA does not allow investment homes.
- Your mortgage payment includes all property taxes & insurance.
- FHA loans offer several different terms of Fixed-rate or Adjustable-rate mortgage loans
Down Payment Gifts
One of the strongest benefits of an FHA loan is that borrowers can obtain the down payment as a gift.
The down payment of 3.5% can be a gift, as long as the person gifting the down payment meets FHA guidelines. A family member, employer, & even a friend can gift you the funds for your down payment as long as the is not an expectation of repayment
Who should get an FHA Mortgage?
FHA Loans are great for anyone that’s looking to purchase or refinance a home that needs the flexible requirements and guidelines of an FHA loan.
Here are a few examples of borrower needs for an FHA loan
- Borrowers with bad credit scores
- Lower down payment required
- Needs a more flexible in the debt to income ratio
- Borrowers that have been in a recent Bankruptcy or foreclosure.
- First-time homebuyers
2020 FHA Loan Limits
FHA loan limits are determined by the county where the home is located, except for properties that are located in metropolitan statistical areas. In metro areas, the limits are set using “the county with the highest median home price within the metropolitan statistical area,” according to HUD.
That’s the geographical aspect of it. The maximum lending amounts for this program are also based on a percentage of conforming loan limits. For instance, FHA’s minimum national loan limit “floor” for low-cost areas is typically set at 65% of the national conforming amount for the U.S.
Here is what you need to know about the limits. The 2019 FHA limits vary from one county to the next.
Here are the national limits:
The FHA’s national low-cost area mortgage limits for 2019 are set at 65% of the national conforming limit of $484,350 (for a one-unit property). Here are the 2019 amounts for this category, by property type:
- One-unit: $314,827
- Two-unit: $403,125
- Three-unit: $487,250
- Four-unit: $605,525
The FHA’s loan limits for high-cost areas are set at 150% of the national conforming cap of $484,350.
- One-unit: $726,525
- Two-unit: $930,300
- Three-unit: $1,124,475
- Four-unit: $1,397,400
The loan amounts in your area may vary from the national limits. Please double check you area on HUD’S website link for loan limits: https://entp.hud.gov/idapp/html/hicostlook.cfm
If you have further questions, please contact an Alliance member Request information from an Alliance Lender
FHA vs Conventional Loans
There are several differences in FHA vs Conventional loans. Here is a quick comparison:
- 580 FICO score requirement
- 3.5% down payment
- Down payment can be a gift from a friend or family member
- FHA allows a “non-occupying” co-signer
- Sellers can pay up to 6% & title towards the closing costs
- Higher allowed debt-to-income ratios
- Much easier to qualify for an FHA loan
- FHA loans are assumable mortgages
- The FHA mortgage rate is lower than a conventional mortgage
- Potentially lower loan limits
- Upfront PMI and monthly PMI is required
- Mortgage insurance is required regardless of down payment
- Potentially higher purchase price
- Does not require a funding fee
- Mortgage insurance is cancelable
- Higher score requirements (620 score required)
- Seller may only contribute 3% towards closing costs
- Mortgage insurance is not required if you put down 20%
FHA Allowable Property types
- Single-family home and 2-4 unit properties
- Condos & Townhomes
- Manufactured and mobile homes
FHA 203(k) Loans
There are several different variations of the 203k rehab loan. We will discuss them in this section.
WHAT IS THE LIMITED 203(k) PROGRAM?
HUD HUD has developed a new FHA insured mortgage program called the 203k Limited Repair Program that permits homebuyers to finance up to an additional $35,000 for TOTAL repair cost into their mortgage, to purchase and improve or upgrade the home before move-in, or to refinance an existing mortgage and add up to $35,000 for repairs or improvements. With this new product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser.
The following repairs can be financed with this program:
- Repair/Replacement of roofs, gutters and downspouts
- Repair/Replacement/upgrade of existing HVAC systems
- Repair/Replacement/upgrade of plumbing and electrical systems
- Repair/Replacement of existing flooring
- Minor remodeling, such as kitchens, which does not involve structural repairs
- Exterior and interior painting
- Weatherization: including storm windows and doors, insulation, weather stripping, etc
- Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwaves
- Improvements for accessibility for persons with disabilities
- Lead based paint stabilization or abatement of lead based paint hazards
- Repair, replacement or the addition of exterior decks, patios and porches
- Basement remodeling which does not involve structural repairs
- Basement waterproofing
- Window and door replacement and exterior siding replacement
- Well or septic system repair or replacement
WHAT IS THE STANDARD 203(k) PROGRAM?
The Standard 203(k) program offers everything that can be completed in the Limited 203(k) program, but even more.
The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5,000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place.
The types of improvements that borrowers may make using Section 203(k) financing include:
- Structural alterations and reconstruction
- Modernization and improvements to the home’s function
- Elimination of health and safety hazards
- Repairs to pools that are in need of health and safety hazards
- Changes that improve appearance and eliminate obsolescence
- Reconditioning or replacing plumbing; installing a well and/or septic system
- Adding or replacing roofing, gutters, and downspouts
- Adding or replacing floors and/or floor treatments
- Major landscape work and site improvements
- Enhancing accessibility for a disabled person
- Making energy conservation improvements
- Conversion of a property of any size to a one-to-four unit structure
Another added benefit of the Standard 203(k) loan, is in the event that the home will be uninhabitable during renovation, you can finance up to 6 mortgage payments into the loan, while waiting for the home to be in a condition that is it inhabitable again. (Restrictions do apply).
Some commonly asked questions about FHA
Who qualifies for an FHA loan?
FHA loans offer some added benefit because they are one of the easiest types of home loans to qualify for. If you have a credit score of 500-579 you may qualify with 10% down. If you have at least a 580 credit score the required down payment is 3.5%.
How long does it take to close on a house with an FHA loan?
The time to close depends on several factors. You can increase the process by getting all of your documents to your loan officer as quickly as possible and responding to any requests in a timely manner.
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 be eligible under certain circumstances to purchase a home utilizing a second FHA. An Alliance member can help answer any questions regarding a second FHA mortgage.
At the end of the day
An FHA loan is a great option for many home buyers. FHA loans are easier to qualify and they offer lower interest rates.
FHA loans make homeownership a priority for folks that need their help for whatever reason.
Are you considering using an FHA loan to buy a home? If so, please request information from an Alliance member
**DISCLAIMER: All policy information contained in this knowledge base article is based upon the referenced HUD policy document. The Dept. of HUD occasionally makes changes to the FHA loan program, so the information given potentially could be out of date. For current up to date information on the FHA loan program, we encourage you to either contact HUD.Gov directly or ask an Alliance member for further information.