FHA Loans are government-insured mortgages which offer flexible guidelines for borrowers who might not qualify for traditional loans due to limited down payment funds or lower credit scores.
What are FHA loans?
If you’re looking to buy a home and have limited funds for a down payment and a lower credit score, you might be interested in an FHA loan. This is a type of mortgage insured by the Federal Housing Administration (FHA), which allows lenders to be more flexible with their requirements for borrowers who may not meet traditional criteria. These loans are commonly used by first-time homebuyers and can have either a fixed or adjustable interest rate.
Here are a few situations where someone might consider an FHA Loan:
- You have a lower credit score: FHA loans are available to borrowers with credit scores as low as 500, although a score of 580 or higher is generally required to qualify for the lowest down payment option. If you have a lower credit score and don’t qualify for a conventional loan, an FHA loan could be a good option.
- You have a smaller down payment: FHA loans require a minimum down payment of 3.5%, which is lower than the 5% to 20% required for most conventional loans. If you don’t have a large down payment saved up, an FHA loan could make homeownership more accessible.
- You have a higher debt-to-income ratio: FHA loans are more forgiving of high debt-to-income ratios than conventional loans. If you have a lot of debt relative to your income, an FHA loan could be a good option.
- You’re a first-time homebuyer: FHA loans are a popular choice for first-time homebuyers because of their lower down payment requirements and more flexible credit standards.
- You’re buying a fixer-upper: FHA 203(k) loans are designed to help borrowers finance both the purchase of a home and the cost of repairs or renovations. If you’re buying a fixer-upper, an FHA 203(k) loan could be a good option.
How do FHA loans work?
FHA loans are a government-backed program that makes homeownership more accessible through more lenient lending requirements. With an FHA loan, a borrower could put down as little as 3.5% if their credit score is at least 580, or 10% if their credit score is at least 500. Nevertheless, there is a trade-off; regardless of the amount you put down, there is a requirement to pay for mortgage insurance.
The FHA collects a one-time Upfront Mortgage Insurance Premium (UFMIP). This premium needs to be entirely financed into the mortgage or paid in full at closing. Additionally, there is an annual mortgage insurance premium, also called monthly MIP, which is collected in monthly installments.
The cost of the annual mortgage insurance depends on factors such as the loan-to-value ratio (LTV), down payment size, and mortgage term length. Lenders calculate the annual payment as a percentage of the base loan value.
What is the maximum amount you can borrow on an FHA loan?
The maximum amount you can borrow on an FHA loan which is set by The Federal Housing Administration is $472,030 in most areas. Moreover, for FHA borrowers in high-cost areas, the maximum loan limit for a 1- unit property in a high-cost county is $1,089,300. Special exception, loan limits in Alaska, Hawaii, Gaum, and the U.S. Virgin Islands cap single-family home loans at $1,633,950.
The following is true of Direct Mortgage Loans FHA Loans:
- 3.5% down payment.
- Flexible use of gift funds and grants for a down payment.
- Flexible qualifying credit – it’s possible to qualify with a lower credit score.
- Upfront mortgage insurance may be financed or paid at the closing table.
Use Our FHA Loan Payment Calculator To See what You Can Afford
FHA Loan Limits
| Property Size | Low-Cost Area “Floor” | High-Cost Area “Ceiling” | Alaska, Hawaii, Guam, U.S. Virgin Islands “Ceiling” |
|---|---|---|---|
| One-Unit | $472,030 | $1,089,300 | $1,633,950 |
| Two-Units | $604,400 | $1,394,775 | $2,092,150 |
| Three-Units | $730,525 | $1,685,850 | $2,528,775 |
| Four-Units | $907,900 | $2,095,200 | $3,142,800 |
How To Qualify For An FHA Loan
FHA Minimum Credit Score
Flexible qualifying credit makes these types of home loans a popular option for those with lower credit scores. To qualify for a FHA loan, your FICO score needs to be at least 580. In rare circumstances we do have the capability to go below 580 but the borrower must have strong compensating factors
FHA DTI Ratio
Your debt-to-income ratio is the percentage of your gross income used to cover your mortgage and other debt payments. The preferred DTI ratio for FHA loans is 43% although this may vary based on your credit score, and may go up to 57%.
FHA Loan Down Payment
The amount you’ll need to pay as a down payment on an FHA Loan depends on your credit score. If your credit score is 580 or higher, you can pay as little as 3.5% of the loan amount. However, if your credit score falls between 500 and 579, you’ll need to pay a larger down payment of 10%. If you’re short on funds, there are several DPA programs available that can help!
FHA 100% Financing
This program provides homebuyers with 100% financing without requiring a down payment. However, closing costs are still required. This is achieved through a combination of a 1st and 2nd mortgage. This DPA program can be used to obtain an FHA loan and the amount of the 2nd mortgage can be up to 3.5% of the sales price or the appraised value, whichever is less. The term for the 2nd mortgage is 10 years.
- Eligibility
- To qualify for the program, you need to have a minimum credit score of 620 and a maximum Debt-to-Income (DTI) ratio of 45%. You must complete a Homebuyer Education course. And the eligible properties for financing are defined by FHA guidelines based on the maximum HUD county limit. The program covers single-family homes, duplexes, manufactured homes, PUDs, townhouses, and condos.
Mortgage Insurance
All FHA borrowers, no matter how much of a down payment they make, must purchase both upfront and annual mortgage insurance.
Pros and Cons of an FHA Loan
Benefits of FHA Loan
- Lower down payment requirements compared to a conventional mortgage
- Lower credit score requirements
- Higher loan limits in certain areas
- Better interest rates for lower credit scores (compared to a conventional loan with similar credit history)
- May allow for a higher debt-to-income ratio
- May allow for a higher loan amount compared to a conventional loan
Cons of FHA Loan
- Mortgage insurance premiums (MIP) are required for the life of the loan
- Private mortgage insurance (PMI) for the life of the loan if you put down less than 10%. If you put down more than 10% there is a graded scale.
- There are loan limits that may impact how much you can borrow
- You may need to meet certain income requirements to qualify
- You may need to provide additional documentation, such as tax returns
Keep in mind that these pros and cons may vary depending on your specific financial situation and the FHA lender you choose. It’s important to do your research and weigh the pros and cons carefully before deciding whether an FHA loan is right for you.
Where To Get An FHA Loan
If you’re considering applying for an FHA Loan, you can use the HUD Lender List Search tool to locate an approved lender located near your area. Alternatively, you can also speak to one of our loan officers at Direct Mortgage Loans, since we are an FHA-approved lender. Don’t hesitate to get in touch with us today!
How To Get An FHA Loan Pre Approval
Are you considering applying for an FHA loan? Here’s everything you need to know to get started.
Find the Right FHA Lender
To apply for an FHA loan, first find a lender who offers this type of loan. Not all mortgage lenders provide FHA mortgages, so it’s important to research and find one that does. Direct Mortgage Loans is an approved FHA lender and could assist with your loan pre-approval.
Gather Your Documents
Before submitting your application, gather the necessary documents to verify your income, employment history, assets, and debts. Typically, pay stubs, tax returns, W-2s, bank statements, and investment account statements are required.
Submit a Pre Approval Application
The next step is to submit a pre-approval application. This step requires you to provide your personal information, financial documents, and authorization for a credit check. Your lender will assess your credit score and history, along with your income and debt-to-income ratio (DTI).
Apply For FHA Home Loan
FAQ’s About FHA Loans
Are FHA loans assumable?
FHA loans offer the benefit of being assumable, which means the buyer could take over the seller’s existing loan instead of obtaining a new one. This could result in lower monthly payments and save you money in the long run. Keep in mind there are specific requirements for both the buyer and the seller for this scenario to work out.
Can I refinance an FHA loan?
Refinancing your FHA loan can be a smart move if you want to lower your interest rates or monthly payments, or if you want to access cash from your home’s equity. You have two main refinancing options to choose from: the FHA streamline refinance and a cash-out refinance.
The FHA streamline refinance enables you to refinance your existing FHA-insured mortgage without an appraisal. On the other hand, the cash-out refinance could allow you to take cash out from your home equity. We suggest speaking with a Loan Officer to determine which option could be right for you.
How many FHA loans can you have?
Since these loans are designed to promote homeownership for primary residences, you can only have one FHA loan at a time. This rule helps ensure the program’s accessibility for first-time homebuyers, and the program’s flexible requirements are not taken advantage of.
Do FHA loans have lower interest rates?
FHA loans typically have lower interest rates than conventional loans. This is because the Federal Housing Administration (FHA), which manages the FHA loan program, insures these mortgages. This insurance protects private lenders from the risk of borrower default, which enables them to offer lower rates. However, your interest rate depends on your specific financial situation, including your credit score, debt-to-income ratio (DTI), and down payment.
Can you remove PMI from FHA loan?
If you have an FHA loan, you can’t remove MIP (Mortgage Insurance Premium) as easily as you can with PMI. To remove MIP from your FHA loan, you can refinance into a Conventional Loan. Once your home has at least 20% equity, you typically won’t have to pay PMI with a conventional loan.
Can you get an FHA loan twice?
You can qualify for an FHA loan twice, although you can only have one active FHA loan at a time. It’s like trading in your old car for a new one. You can only finance one car at a time, but you can purchase multiple cars throughout your life. The FHA program aims to help people become homeowners, so you can use the program again after you’ve paid off your first FHA loan and moved into a different primary residence.
*When compared to a conventional loan. Rates subject to market changes.