What Is A FHA Mortgage Loan?
This is a government backed mortgage which is issued by the Federal Housing Administration, or also known as FHA. This type of loan was designed for first time home buyers with minimum credit score and those who may not have the 20% down payment that conventional loans require. Most FHA loans require a 3.5% -10% down payment.
These loans are issued by the government but they are offered by FHA approved mortgage lenders. If you are a home buyer and have been turned down by other lenders because of your credit score or low down payment you may want to try this route.
FHA loans are great for first time home buyers but even if you want to buy your second home and are looking to make it your primary residence you may also consider an FHA loan.
According to bank rate.com ” For 2020, the floor limit for FHA loans in most of the country is $331,760, up from $314,827 in 2019. For high-cost areas, the ceiling is $765,600, up from $726,525 a year ago. These limits are referred to as “ceilings” and “floors” that FHA will insure. FHA updates limit amounts each year in response to changing home prices”
FHA loan requirements
If you are looking for a FHA loan there are certain requirements that you need to meet, I have listed them below to help you make your decision
- If you are looking for a down payment of 3.5% your FICO score has to be 580 or higher
- A FICO score of 500 to 579 will attract a down payment of 10%
- A debt-to-income ratio of 50% or less
- Documented, steady employment and income this has to be verifiable
- Your income has to be verifiable, your pay stubs, tax returns and bank statements will be used to verify your income
- You’ll live in the home as your primary residence like I mentioned above if you want to use the FHA loan to finance a second home you will need to make the second home your primary residence
- You have not had a foreclosure in the last three years or file for bankruptcy in the past year
You have to know that these FHA requirements are better than what other mortgage lenders require out there, for example you will never be approved for a mortgage by convectional lenders if you have a credit score of 500, but may get approved for a FHA loan
Conventional vs FHA Loan Requirements
Convectional loans are not issued by the government therefor they may not be as lenient as FHA loans. Therefore, they require a much higher credit score and your income has to be very solid income. The lowest most allowable credit score on most convectional loans is 620, while FHA loans allow credit scores as low as 500.
- The minimum credit score is 600
- The down payments are between 3 to 20%
- You can have loan terms that range from 10,15,20,30 years
- The private mortgage insurance premiums may range from 0.55% to 2.25%
- The interest type can be both variable or fixed rate
- The minimum credit score on FHA loans is 500
- If you have a credit score of 580+ you can put a down payment of 3.5% and for someone with a credit score of 500-579 you will be required to pay a down payment of 10%
- When you are paying mortgage insurance premiums you have to pay an upfront premium of 1.75% of the loan value and an annual premium of 0.45% to 1.05%
- The type of interest is on a fixed rate
What banks do FHA loans?
Most mortgage lenders, big banks and credit unions are FHA approved, This makes the supply of FHA loans high because they are offered by so many lenders. It has in turn given lenders the pressure to offer low FHA rates and low FHA rates.
I would advise you to shop around because this might pay to do this you might find your dream rate by doing so .
Different banks use different methods to underwrite, You may be declined for a FHA loan by 1 bank but approved by another.
The FHA also issues other types of FHA loans that are offered by private lenders, I have compiled some of them below :
The FHA 203(k) loan
This type of FHA loan helps you as a home buyer to buy and renovate the house all this you can do with just a single mortgage. As a home-owner you can also refinance your existing mortgage and add costs of remodeling into the new loan. There are also two types of FHA 203(k) loans:
- Limited 203(k) – this has an easy application process, the repairs must not be over $35000
- Standard 203(k) – additional paperwork is needed and applies to improvements costing $5000 or more the value of the property must still fall within the FHA loan limit
Home Equity Conversion Mortgage, or HECM
This is a type of reverse mortgage which is very which is the most popular and it is issued by the FHA it allows homeowners 62 years and over with significant equity or those who own their homes outright to withdraw a portion of their home’s equity.
The withdrawal amount varies by borrower and depends on the age of the youngest borrower or eligible non-borrowing spouse, current interest rates and the lesser of the home’s appraised value or the HECM FHA mortgage limit or sales price.
FHA Energy Efficient Mortgage (EEM) program
This a type of mortgage issued by the FHA that allow home buyers that are willing to purchase homes that are energy efficient to purchase homes for example energy star certified buildings. It can also be used to purchase old homes and make it energy efficient.
FHA Section 245(a) loan
If you know that your income is going to increase overtime this type of mortgage is for you, starting with small monthly payments that will go up gradually. There are five plans available.