By: Mutual of Omaha Mortgage
What is an FHA Loan?
Since 1934, the Federal Housing Administration (FHA) has helped make it possible for potential homebuyers to get the financing they need to achieve theirs dreams of homeownership. As part of the U.S. Department of Housing and Urban Development (HUD), FHA mortgage loan programs are insured by the government and are offered to consumers by FHA-approved lenders. Unlike conventional mortgage loans, FHA loans have a lower down payment requirement and credit score threshold for borrower approval. Although not exclusively designed for first-time home buyers, according to the Mortgage Bankers Association, 75% of first-time home buyers purchase their property with financing from an FHA loan. Below are some frequently asked questions about FHA mortgage loans.
What are the benefits of an FHA Loan?
FHA loans are attractive to many prospective home buyers because of the unique benefits they offer. FHA loans have historically provided potential buyers with more accessible and affordable financing options. Here are four benefits of FHA loans:
- Lower Credit Score Requirement - An FHA loan typically requires a lower credit score for applicants compared to many conventional loan programs. For example, a prospective homebuyer can qualify for an FHA loan with a credit score as low as 580.
- Lower Down Payment - FHA loans are well-known for having some of the most affordable down payment options for prospective borrowers. The required down payment for an FHA loan can be as low as 3.5% for prospective buyers who have a credit score of at least 580 or higher. If a buyer’s credit score is below 580, they could still secure a lower down payment of 10%, compared to 20% which is often the required minimum for many conventional loans.
- Gifts Can Be Used Toward Down Payment - The down payment on a mortgage loan can be an expensive hurdle for some potential home owners. The FHA allows down payment funds to come as part of monetary gifts received by the borrower. Borrowers can receive gift money from a family member such as a spouse, domestic partner, child, parent, legal guardian, or a family member related by blood which can be approved to be used toward an FHA loan down payment.
- Higher Debt-to-Income (DTI) Ratios - The debt-to-income (DTI) ratio is the total sum of monthly debt payments, including your mortgage payment divided by your gross income. Although maximum DTI limits vary from lender to lender, most conventional loans restrict borrowers to 36%. A borrower can be approved for an FHA loan with a DTI of 40%. Prospective FHA loan borrowers may still be approved with a DTI as high as 50% with the consideration of additional factors such as large cash reserves or other residual income.
How to qualify for an FHA as a first time home buyer?
It is a misconception that a first time home buyer can never have owned a home before. In order to qualify as a first time home buyer an individual cannot have owned a home or principal residence within the past three years. Additionally, the amount of money a home buyer needs to put down for an FHA loan varies and is dependent upon credit scores and income.
To qualify as a FHA loan home buyer the minimum down payment is:
- 5% if your credit score is 580 or higher.
- 10% if your credit score is between 500-579.
How much FHA loan can I qualify for?
Loan limits vary from region to region. The U.S. Department of Housing and Urban Development (HUD) analyzes a series of criteria to determine how much a prospective applicant can borrow for their mortgage loan. In addition to localized nuances, a borrower’s total income and debt are also considered as part of the loan qualification review. FHA loans allow borrowers to take on a mortgage payment that represents 31% of their gross income if the borrower also has existing debt.
What are FHA loan limits?
The FHA revises its loan limits based on movements in the housing prices. Revised loan limits go into effect at the beginning of the year. The loan limit for your FHA loan will depend on where the property is located. The U.S. Department of Housing and Urban Development (HUD) determines what locations are deemed high-cost or low-cost areas.
- Low-cost counties loan limits:
- $314,827 for single family home
- $403,125 for a 2-unit home
- $487,250 for a 3-unit home
- $605,525 for a 4-unit home
- High-cost counties loan limits:
- $726,525 for a single family home
- $930,300 for a 2-unit home
- $1,124,475 for a 3-unit home
- $1,397,400 for a 4-unit home
- Mid-cost counties loan limits will fall somewhere in between.
The HUD has a list of loan limits available on their website.
How much does a first time home buyer need for a down payment?
When it is time to start planning a budget to cover the costs of purchasing your first house, one of the most important things is determining the down payment. It is important to understand what you can afford, and how much you can borrow.
The amount of money you need to put down for an FHA loan varies. The minimum FHA loan down payment is 3.5% if your credit score is 580. It is necessary to put down 10% if your credit score is 500-579.
How long does it take for an FHA loan to be approved?
The average FHA loan approval process takes between 30 to 60 days. There are three steps in the approval process:
- Application – This is when you submit a mortgage application with an FHA-approved lender. The lender will start the loan, and set the terms of what the loan will be.
- Processing – Once you agree to the loan terms and have signed the document stating this, the loan now goes through the underwriting process. Underwriting is the process of verifying the documents you submitted (income, debt, credit score.)
- Loan Completion Documents – Once the underwriting is complete, the documents are prepared by the lender.
Can you buy a foreclosure with an FHA Loan?
A consumer can purchase a property in foreclosure with an FHA loan as long as the foreclosed home meets the FHA's requirements. Factors such as property value, safety and habitability are typically assessed. An FHA loan for a property in foreclosure requires:
- An Appraisal – A special appraisal or fee appraisal is needed to make sure the home meets FHA standards. The fee appraisal is part traditional appraisal and part inspection. The appraisal part estimates the home's value, while the inspection part looks for defects and safety issues.
- Home Inspection - The fee appraisal is no substitute for a home inspection. Whereas the fee appraiser works for the lender, the home inspector works for the buyer and does a more detailed job.
- Repairs - FHA rules say that sellers must do the repairs necessary for making the house meet FHA standards, and they must do so before closing.
Can you buy a condominium property with an FHA loan?
For prospective homeowners who are not interested in single-family or multi-family properties, condominiums are a great housing option. A potential homeowner can purchase a condominium with an FHA loan providing the condo development is an FHA approved development. FHA approved condominiums must meet the eligibility requirements set by the U.S. Department of Housing and Urban Development (HUD). The requirements ensure that the property is adequately maintained and will remain a desirable place to live.
Additional HUD condo requirements for approved condominium properties include:
- Being in compliance and good standing with the state and local laws and regulations
- Containing at least two dwelling units
- Having no more than 25% of the property’s total floor area used for non-residential or commercial purposes
- Having no more than 10% of the units owned by one investor or entity
- Having no more than 15% of the total units more than 30 days past due on their condo association dues payments
- Allocate at least 10% of their budget to a reserves account to be used on maintaining the common areas
- Carry adequate hazard, flood, liability and other insurance
The HUD offers a list of FHA approved condominium projects on their website.
How many active FHA loans can a borrower have?
In general, FHA loan parameters are designed for borrowers to have one FHA mortgage loan at a time. Without the exception of certain extenuating circumstances, borrowers will likely not be approved for additional FHA loans while one is active.
Special circumstances that could warrant a borrower having two or more active FHA loans include job relocations, changes in family size, and situations where a co-borrower vacates the property with an existing FHA mortgage loan to purchase a home of their own.
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