FHA mortgage, which is an insured loan, can be a good option for many homebuyers. However, there are some important things for you to know before investing in an FHA mortgage. To help you find the best loan, we’ve outlined everything you need to know about FHA Mortgages.
What is FHA Mortgage?
FHA mortgages are insured by the Federal Housing Administration (FHA). The FHA is a government agency that guarantees the repayment of mortgage loans to qualified borrowers.
The FHA offers a variety of mortgage products, including conventional fixed-rate mortgages and adjustable-rate mortgages.
Most people think of FHA loans as being for first-time homebuyers or those with poor credit. But there are many other types of applicants who are eligible for an FHA mortgage, including:
Seniors. Seniors can get an FHA loan if they meet certain qualifications, even if their income is low or they have bad credit.
Military personnel. Active military personnel stationed overseas can also qualify for an FHA loan if they meet certain criteria and have a good credit history.
Elderly borrowers. If you meet age requirements, you may be able to get an FHA loan even if your income is low or your credit has not been great over time.
Low Credit Score Requirements
FHA lending is designed to help people with low credit scores obtain mortgages. The minimum FICO score required to be considered for an FHA mortgage is 580; this will change in the future as the agency adjusts its underwriting standards further.
It’s important to note that not everyone with a low credit score can qualify for an FHA mortgage. To start, you’ll need to have a good income and a down payment of at least 3 percent of the purchase price. Once you meet these requirements, you can see if your credit score is high enough to qualify for an FHA loan.
Credit Score: The minimum credit score required for an FHA loan is 580. However, most lenders will require at least a 620 credit score in order to qualify.
If you have excellent credit scores, it’s still possible that an FHA loan may be available to you. Typically, lenders use your credit scores as part of their evaluation process when determining whether or not they want to offer to finance borrowers with low credit scores. If they do decide to offer to finance, they’ll use more than just one factor when evaluating your application. They may also look at factors such as how long it’s been since debts were paid off and the amount owed on each line of your credit report
Low Down Payments
The FHA mortgage loan program is designed to help qualified buyers buy homes that they can afford. The program uses a variety of factors to determine if you qualify for an FHA loan.
You must meet the following requirements before you can apply for an FHA loan:
- Be a U.S. citizen or permanent resident
- Have a good credit history and income
- Have a down payment of at least 3.5% of the purchase price of your home
- Only non-conforming loans are eligible for an FHA mortgage
You don’t need to pay for the first year of coverage with your down payment or closing costs. Instead, you pay an upfront premium with your loan amount and monthly payments. There are two types of upfront premiums: an upfront premium plus interest and an upfront premium payable at closing.
The upfront premium plus interest is paid over 30 years, while the upfront premium payable at closing is paid in a lump sum at closing.
The HFMA website has more information on different types of upfront premiums and their cost basis.
The minimum down payment required varies depending on which state you live in and whether you’re purchasing a one-unit property or multiple units in one building (such as condos). In most cases, the minimum down payment ranges from 3% for single-family homes to 5% for condos (or higher if you have bad credit).
Optional Low-Cost Mortgage Insurance
The FHA mortgage insurance can be a cost-effective solution for borrowers seeking to purchase a home with a large down payment. The program is designed to help first-time homebuyers make the transition from renting to owning, and it offers a low down payment option for borrowers who have sufficient income and equity in their homes.
The FHA mortgage insurance is optional, but you should know that if you choose to decline this coverage, your application may be denied.
This can happen if you don't provide all of the required documentation or if your credit history doesn't meet FHA standards.
The FHA classifies borrowers into one of three categories: high-risk, moderate-risk, or low-risk. You must be in the moderate-risk or low-risk category to qualify for an FHA mortgage loan with no down payment requirement.
Flexible Debt requirements and Income
The FHA loan program is intended for borrowers who have good credit but may not be well-to-do. Interest rates are typically lower than the standard 30-year fixed rate, and borrowers can choose from a wide range of down payment options.
The biggest difference between an FHA and a conventional loan is that FHA loans have more flexible debt requirements and income limits.
A borrower with good credit will likely qualify for an FHA loan regardless of their income or debt-to-income ratio. However, in order to take advantage of the lower interest rates offered by this type of mortgage, a borrower must qualify based on their debt-to-income ratio (DTI).
This is calculated by dividing your monthly debt payments by your gross monthly income. If you make $3,500 a month in gross earnings and have $2,000 in monthly bills, then your DTI would be .25 (your monthly debt payments divided by your gross monthly income).
The minimum DTI requirement for most FHA loans is 3%. This means that if you only owe $300 per month on your debts (after subtracting any tax-deductible expenses), you could still get an FHA loan with a DTI of 2%.
Seller can pay for Closing Costs
In most cases, the seller will be willing to pay closing costs. However, there are times when the seller is not willing to do so. If this happens, it’s important to know your options so you can make the best decision for yourself and your family.
- Closing Costs
When the seller pays for closing costs, the seller usually pays it off in one lump sum at the end of escrow. These costs include:
- Loan Modification Fees
This fee is charged when a loan modification request is denied by a lender. It covers all charges associated with modifying a loan so that it qualifies as affordable and meets your goals.
- Title Insurance Fees
These costs cover the cost of title insurance in case there were any liens or encumbrances on your home at the time you purchased it. This protects you from liability should something happen after you’ve moved into your home and before you close escrow. Title insurance also protects against future claims from people who may have an interest in the property because they had a lien against their property back when they owned it but weren’t able to get paid by anyone else who took ownership of their property.