FHA Loans are governed by the Housing of Urban Development (HUD), which offers flexible guidelines for borrowers with limited down payment funds and an imperfect credit history. Since FHA loans require lower credit scores and down payments, they are especially popular among first-time home buyers.
What is a FHA Loan?
An FHA loan can be a good option for individuals who have a lower credit score, a smaller down payment, or a higher debt-to-income ratio.
Here are some situations when you might consider getting 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.
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.
FHA Loan LimitsÂ
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 |
Qualifying for an FHA Loan
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 Â
Debt-to Income 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%.Â
Down Payment
A down payment of 3.5% is the minimum amount needed, while 5% down covers most others. If you’re short on funds, there are several DPA programs available that can help!Â
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
Pros:
- 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:
- 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.
How To Apply for an FHA Loan
Are you considering applying for an FHA loan? Here’s everything you need to know to get started.
Find the Right FHA Lender
First, you’ll need to find FHA lenders who can offer you this type of loan. Not all mortgage lenders offer FHA mortgages, so it’s important to do your research and find one that does. This is where Direct Mortgage Loans comes in. You’ll find, as you’re searching for an FHA lender, that when you compare rates, fees and terms, Direct Mortgage Loans is a cut above the rest.
Prepare the Documentation
When applying for an FHA loan, you’ll need to provide your lender with your tax returns, income documentation, and other financial information. It’s important to have all of this information organized and readily available to speed up the application process.
While there are some cons to consider, there are also many benefits to an FHA loan. For example, you may be able to qualify for a higher loan amount than with a conventional loan. Additionally, the monthly payments may be lower due to a lower interest rate when compared to a conventional loan. (Rates are subject to change based on market conditions).
Finally, it’s important to be aware of the closing costs associated with an FHA loan. These may include appraisal fees, inspection fees, and other costs. Be sure to factor these into your budget when considering an FHA loan.
In summary, if you’re considering an FHA loan, be sure to research FHA lenders and their rates, fees, and terms. Be aware of the income requirements, loan limits, and other factors that may impact your ability to qualify for the loan. While there are some cons to consider, there are also many benefits to an FHA loan, such as a lower down payment and lower monthly payments.
*When compared to a conventional loan. Rates subject to market changes.