An FHA mortgage loan is a home loan which is underwritten to the guidelines of and insured by the Federal housing administration. FHA loans are commonly referred to as a first time home buyer loan, but they can actually be used by anyone that meets the guidelines. Qualified borrowers can purchase a single-family residence, townhome/condominium, manufactured home as a primary residence, as well as a two, three or four unit complex.
The Federal housing administration was created in 1934 as a means to assist individuals and low income families with homeownership. At the time, many banks and lenders required homebuyers to put down a substantial down payment which was prohibitive for many people considering that was right in the middle of the great depression. Consequently millions of Americans have been able to live the dream of homeownership due to the FHA home loan.
Because FHA loans are insured by the federal government, lenders who provide the financing for borrowers on an FHA mortgage are guaranteed that if a homeowner defaults on the loan that the Federal housing administration will compensate the bank for their losses. Thus lenders are willing to finance those that meet FHA guidelines, but might not otherwise qualify for a traditional home loan.
The guidelines to qualify for an FHA loan are considerably less restrictive than those of a traditional conventional mortgage loan. The down payment requirement is only 3.5% as compared with as much as 10 to 20% for a conventional loan. The credit profile requirement for an FHA mortgage is considerably less stringent than that of a traditional home loan as well. While conventional loans have strict credit score guidelines and payment history, FHA is much more lenient in terms of minimum credit scores as well as one’s over all payment history. FHA allows a greater percentage of one’s income to be allocated towards a mortgage payment and monthly debt than that of a conventional home loan as well. Additionally for borrowers that have had income challenges in the semi recent past, FHA is also more forgiving and lenient. Unlike a conventional mortgage, FHA allows borrowers to qualify with two years seasoning after a chapter 7 bankruptcy and only one year of good payment history with a chapter 13 bankruptcy. Also unlike a conventional loan which requires seven years seasoning for those who have had a foreclosure, FHA only requires three years of restored credit. While FHA does not have a minimum FICO score requirement, lenders who finance FHA insured mortgages do typically require borrowers to have a minimum of a 620 mid score. There are some investors which do allow credit scores into the upper 500 range, however individuals with that type of credit profile must be able to demonstrate extenuating circumstances for their lack of a higher credit score.
FHA loans are offered as a 30, 20 and 15 year fixed rate amortization period. In addition, FHA also provides guidelines for a three and five year adjustable rate mortgage loan. Because FHA insured home loans do not require a very large down payment, they intern have two forms of loan guarantee known as mortgage insurance premium (MIP). When the loan is initially designed, the originating lending institution will add what is referred to as the upfront mortgage insurance premium to the amount financed. The upfront mortgage insurance premium varies depending upon the down payment and the term of the loan, but all FHA loans are required to have it. In addition to the upfront mortgage insurance premium, there is also an annual mortgage insurance requirement which is paid on a monthly basis. That too is based upon the loan-to-value and number of years financed. FHA loans are very competitive in terms of the interest rate and the required closing costs. When compared with a conventional loan of a borrower with a good or excellent credit rating, the interest rate is always lower.
Maximum loan amount
FHA has predetermined maximum loan amounts depending upon the county and state in which the property is located. The county loan limits are determined by the Department of Housing and Urban Development(HUD) and are based upon the cost of housing and median income in various regions around the country. It is important to know the county limit of the area in which you are planning to buy before you begin your search for a new home so that you can plan accordingly. If you do intend to purchase a home where the price is greater than the local county limit, then you will need to pay a larger down payment in order to meet stay within the maximum loan size.
The FHA 203b is the standard and most popular mortgage loan offered by FHA. It can be used to purchase or refinance a single-family residence, condominium/townhome, or multi family development up to four units. This loan does require that the borrower be an owner occupant however, for an individual wishing to purchase a multiple unit complex the remaining portion can be rented out. This loan requires a minimum of 3.5% down payment and all borrowers must meet the debt to income ratio as set forth by the sponsoring lender.
Rate and Term Refinance
The FHA rate and term refinance otherwise known as a no cash out refinance allows homeowners to refinance their current home loan into an FHA mortgage up to 97.75% loan to value. The guidelines permit borrowers to pay off any existing liens on their property and the cash back at closing cannot exceed $2000.
The FHA streamline refinance is designed for individuals who currently have an FHA home loan and are simply looking to lower their interest rate. The process is much easier than a traditional home loan as many of the steps borrowers would normally have to take have been eliminated, thus the term streamline is used. Eligibility for this loan requires borrowers to have a clean mortgage payment history with their existing loan, it does not require an appraisal and borrowers cannot receive more than $500 cash back at closing. Additionally, the new payment must be lower than the existing mortgage loan unless one is refinancing from an adjustable rate mortgage to a fixed rate loan.
Cash out refinance
An FHA cash out refinance loan is designed for borrowers who have built up equity in their home and want to access a percentage of that money. FHA will currently allow borrowers to finance up to 85% of their home’s current appraised value and the money can be used for home-improvement, debt consolidation or simply as cash back to the homeowner at closing. The qualifying requirements for this loan are the same as the 203B in terms of income, credit, and property type.
The FHA 203K loan is intended for borrowers who are purchasing a new home and would like to do a remodel during the process or for individuals that want to modernize their existing home. This loan product allows current homeowners and soon to be homeowners the opportunity to complete significant improvements to a house while including all of the costs in the new loan.
Frequently Asked Questions
What is FHA mortgage insurance?
There are two facets to FHA mortgage insurance otherwise known as MIP. The first is an upfront mortgage insurance premium of 1.75% which is not determined by the loan to value or the term of the loan. All FHA loans are required to have it and the upfront premium can either be paid in cash or added to the loan principal. The second type of MIP is the annual premium which is paid on a monthly basis throughout the life of the loan. This premium is in fact determined by the loan amount, loan-to-value and number of years financed. For many borrowers the annual premium is .85%, but that figure can be higher or lower depending upon the scenario.
Can borrow or use an FHA loan to purchase a second home?
Under certain circumstances such as a relocation, borrowers are permitted to use an FHA loan to finance a second home as long as they can prove that they are moving to the area in which the home will be located. In the case where individuals going through a divorce have a joint FHA loan for their current property, the interested party can apply individually for a second loan in order to purchase separate houses to live in.
Does FHA allow a non-occupant co-borrower?
FHA does allow for a non-occupant co-borrower as long as that individual needs the income and credit qualifying guidelines. This can be very helpful for first time homebuyers who don’t quite qualify with their own income and a relative is willing to co-sign to help them attain their new home.
Does FHA insure manufactured housing loans?
FHA loan guidelines do allow for manufactured housing although only certain lenders are willing to finance that type of property. The guidelines require that the home must be on a permanent foundation, the land must be owned, and that the house must have been manufactured after June 14, 1976. In addition, the property must meet all other FHA standard qualifying guidelines.