An FHA Loan is an affordable, accessible loan option that’s particularly suitable for first time home buyers. It protects lenders in the instance of borrower default and helps prospective home buyers who don’t have great credit, or who are making a low down payment on a home.
What is an FHA loan, and how can it help first-time buyers?
Navigating the home buying market is an exciting time for first time buyers. The terrain of the market’s landscape is a field of lenders, loan requirements, mortgages, and finance. Homebuyers can navigate this terrain more easily with the right compass to guide them towards the smart options that will ease their journey towards becoming a new home owner.
Understanding the nuances of Federal Housing Administration (FHA) loans is a good starting point. This knowledge can prepare you for all the intricacies of the home buying process so you can move forward with the buying process with confidence.
So what exactly is an FHA loan?
FHA loans are like warranties for the real estate market: they offer a certain level of protection for lenders in case a borrower defaults, and they’re typically accessible and economical for buyers who are making low down payments or have less than ideal credit.
The FHA origin story
•FHA Loans are mortgages insured by the Federal Housing Commission (FHC), originating during the staggering amount of foreclosures and defaults that occurred in the 1930’s when Depression Era struggles and abandoned homes were the norm across the United States.
•The objective of the FHA Loan Initiatives was to breathe fresh life into the housing market while offering mortgage lenders protection against risks.
The essence of FHA loans
•FHA Loans are protected by the Federal Government, who insures loans for FHA approved lenders, thus decreasing risk potential while enticing new home buyers.
•Since 1934, the FHA has insured over 38 million properties worldwide.
•The FHA pays a claim to lenders in the instance of borrower default.
•They’re particularly popular for first time home buyers due to the low down payment requirements for those with a reasonable credit score.
Fine tuning your FHA loan knowledge
As a first-time homebuyer, a little insight into FHA Loan Requirements and Borrower Qualifications can help you determine if an FHA loan is the right fit for you.
FHA loan requirements and borrower qualifications
•Credit scores of at least 500: Those with credit scores between 500-579 need to make a 10% down payment. Borrowers with a credit score of 580 and above can make a down payment of at least 3.5%.
•A social security number and steady employment.
•An FHA approved appraiser for the borrower for property appraisal.
•Front-end ratio less than 31% of gross income: Approval with a percentage of up to 40% is possible depending on the circumstance.
•Back-end ratio less than 43% of gross income: Approval of up to 50% is possible.
•At least two years out of Bankruptcy and re-established good credit
•A minimum three years out of Foreclosure: Borrowers must restore their good credit. Exceptions are occasionally allowed in the case of mitigating circumstances and improved credit.
•Minimum appraisal standards: If the home you’re buying fails to meet specific minimum appraisal standards, and a seller refuses to agree to required repairs, the borrower’s sole option is paying for the repairs at closing.
How to get an FHA loan
As the old adage goes: location, location, location. For borrowers, obtaining a loan is inexorably linked to your state and country. Maximum mortgage limits for FHA loans are dependent upon region and will vary accordingly.
Currently, there’s an increase in home values that has led to a corresponding increase in limits for FHA Forward Loans throughout the U.S., which are used to purchase or refinance a home. FHA loan limits enable a borrower to build equity until they’re able to pay down their loan debt.
•Loan limits for Alaska, Guam, Hawaii, and the Virgin Islands are adjustable up to 150% of the high-cost area ceilings.
•Loan limits by area, specific address, or county can be determined by using the following FHA Loan Limits calculator.
Obtaining an FHA loan
How do you go about getting an FHA Loan? First, you must find an FHA approved lender, and they can help you obtain mortgage quotes for an FHA Loan based on your eligibility. Or submit your information electronically for a loan request and receive a custom quote.
•California: The minimum down payment for FHA loans in California is 3.5%, and the U.S. Department of Housing and Urban Development (HUD) requests that FHA borrowers have a total debt-to-income ratio no higher than 43%. The FHA loan limits range from $271,050 to $625,500.
•Washington: Consumer credit scores are a crucial factor for WA State FHA Loans, and the minimum down payment requirement is 3.5% of the purchase price or approved home value. The size of the loan is also important, as WA FHA Loan Limits range between $271,050 to $540,500.
FHA loan interest rates
Interest rates for FHA loans are dependent on the borrower’s qualifications.
These qualifications include:
- Monthly income
- Credit score
- Monthly debt
Contacting an approved FHA Loan Lender can help you determine what type of FHA Loan you qualify for, or you can receive an automated quote.
So, now you’re ready to be approved
So you’re at that point where you are ready to be approved for your first FHA loan. You need to make a down payment and understand more about FHA mortgage insurance, as well as closing costs. Where do you start?
FHA approved lenders
Choosing an FHA approved lender can be overwhelming, and you must take into account what you're looking for. This could be low monthly payments or closing costs, a shorter term on your mortgage, or something specific to a first-time buyer. FHA approved lenders can help you better understand your options.
FHA down payments
A down payment is the direct amount spent on a home, typically combined with a loan to cover the entire home purchase price. You don’t need a perfect credit score and you can make a low down payment, which is why FHA loans are simple and offer a high likelihood that you will qualify.
Mortgage insurance is required for an FHA loan. There are two types of premiums:
Upfront Mortgage Insurance Premium (UFMIP): No matter your credit score, pay a premium of 1.75%. Payment can be added to the price of your mortgage, or paid at the time of closing as part of settlement charges.
Annual MIP (Charged Monthly): A monthly charge that’s combined into your mortgage payment. It’s based on a percentage of the loan amount compared to the borrower’s loan to value (LTV), loan size, and length of the loan.
FHA closing costs
An important but often overlooked expense in your home purchase are your closing costs. They are typically 3-5% of the loan, but vary depending on your credit. They include:
- Appraisal fees
- Credit reports
- Tax services
- Home inspections
FHA approved homes and communities
First-time home buyers can peruse FHA approved homes and communities, which meet specific safety and security requirements. Additionally, there are FHA approved guidelines for buying a home.
Other FHA loan options
FHA construction loans
What if you are a new homebuyer who not only wants to purchase your first home but build it as well? In this case, consider the different types of FHA construction loans that you need:
A Construction-Permanent Mortgage: Ideal for buying land to build your home, or if you want to build your new house from the ground up.
203(k) Rehab Mortgage: If you are purchasing or refinancing an existing home that requires repairs, upgrades, or rebuilding, then there are two existing types of 203(k) mortgage options:
•Streamlined: Upwards of $35k for improvements, repairs, and upgrades.
•Standard version: For larger projects, including homes that are completely demolished and rebuilt.
As a homeowner, investing in your property may require an FHA Refinance to help make your equity go the extra mile. This option is only available to homeowners who use their home as their primary residence.
•FHA Streamline Refinance: If you owe more on your mortgage than your home is worth, or your current mortgage rate is higher than today’s mortgage rate, then this is a good option for you.
•Other Refinancing Options: FHA Cash-Out Refinance, FHA SImple Refinance, FHA Rehabilitation Mortgages.
The FHA 203b is a standard, single family loan funded by a mortgage company, bank, or savings and loan association, and the mortgage is insured by HUD. If borrowers meet the required FHA credit qualifications, they’re entitled to approximately 96.5% financing and must pay an annual premium.
Simplify the home buying process
For homebuyers, there are a lot of choices to consider and decisions to make. FHA Loans should be the first chapter in your home purchasing story.
First-time buyers should be able to focus on the important aspects of becoming homeowners and create a lasting memory of purchasing their very first home.
Open Listings helps to simplify the process and remove the stressful components that can confuse home buyers, offering a modern digital experience combined with personalized attention.