An FHA loan is a mortgage insured by the Federal Housing Administration. The FHA is a governmental agency within the U.S. Department of Housing and Urban Development. Borrowers with FHA loans pay for mortgage insurance which protects the lender from loss if the borrower defaults on the loan. With the risk-factor out of the underwriting equation, lenders are more lenient in issuing loans with significantly low down payments. Because the mortgage is insured, lending institutions offer FHA loans at attractive interest rates and with flexible minimal qualification requirements. FHA loans have a less rigorous lending standard and lower down-payment requirements (from 3.5% – 10% down payment). For this reason, FHA loans have become a very popular loan product especially among firs-time home buyers. FHA loans are only available on 1-4 unit properties.
The borrower’s credit score will reflect the amount of financing available and the amount of down payment required. To be eligible for an FHA loan, the borrower must have a credit score of at least 500. Borrowers with credit scores between 500 and 579 must make a down payment of at least 10%. To get a mortgage with a down payment as low as 3.5%, the borrower needs a credit score of 580 or higher. FHA borrowers can use their own savings as the source of the down payment. Additionally, other allowed sources of cash include a gift from a family member or a grant from a state or local government down-payment assistance program.
Because an FHA loan does not have the strict standards of a conventional loan, it requires TWO kinds of mortgage insurance premiums: (1) Upfront Mortgage Insurance Premium (UFMIP); and (2) Annual MIP (charged monthly).
(1) The Upfront Mortgage Insurance Premium is a one-time upfront premium payment usually paid at closing or it can be rolled into the mortgage. Typically, the UFMIP is 1.75% of the home loan. For example, on a $400,000 loan, the borrower will be responsible for $7,000 in UFMIP.
(2) Annual MIP– although this is called an annual premium, it is paid for in monthly installments within the mortgage payment. The amount of the mortgage insurance premium is a percentage of the loan amount, based on the borrower’s loan-to-value (LTV) ratio, loan size, and length of the loan. CLICK HERE for 2017 FHA MIP Rates
FHA Loan Requirements
The requirements for FHA loans are set by the Federal Housing Authority and include:
Borrowers must have a steady employment history or worked for the same employer for the past two years.
Borrowers must have a valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state.
Borrowers must pay a minimum down payment of 3.5 percent. The money can be gifted by a family member.
New FHA loans are only available for primary residence occupancy.
Borrowers must have a property appraisal from a FHA-approved appraiser.
Borrowers’ front-end ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, homeowners insurance) needs to be less than 31 percent of their gross income, typically. You may be able to get approved with as high a percentage as 40 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
Borrowers’ back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) needs to be less than 43 percent of their gross income, typically. You may be able to get approved with as high a percentage as 50 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
Borrowers must have a minimum credit score of 580 for maximum financing with a minimum down payment of 3.5 percent.
Borrowers must have a minimum credit score of 500-579 for maximum LTV of 90 percent with a minimum down payment of 10 percent. FHA-qualified lenders will use a case-by-case basis to determine an applicants’ credit worthiness.
Typically borrowers must be two years out of bankruptcy and have re-established good credit. Exceptions can be made if you are out of bankruptcy for more than one year if there were extenuating circumstances beyond your control that caused the bankruptcy and you’ve managed your money in a responsible manner.
Typically borrowers must be three years out of foreclosure and have re-established good credit. Exceptions can be made if there were extenuating circumstances and you’ve improved your credit. If you were unable to sell your home because you had to move to a new area, this does not qualify as an exception to the three-year foreclosure guideline.
The property must meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).
For more information on FHA Loans and other related topics, call Real Estate Attorney, Sergey Kalantarov, Esq. of Kalantarov Law PLLC at (718) 425-4162.