FHA Loans: Everything You Need To Know (2019 Guide)
Are you looking to buy your dream home but don’t have the strongest credit score?
Do you have a finite amount of money available for a down payment?
Then an FHA Loan is the way to go.
Even with so many perks, you must be aware of the mortgage insurance costs that come with FHA Loans. Truth be told, you might end up with a higher monthly mortgage payment than that of a conventional loan.
Below you will find everything you need to know about FHA Loans.
What is an FHA Loan?
An FHA Loan, or Federal Housing Administration Loan, is a mortgage insured by the government.
This allows for lenient lending standards compared with conventional loans, a perk that helps homeowners who may not qualify for conventional loans, which require higher credit scores and often a larger down payment.
FHA home loans are perfect for first-time home buyers who are still strengthening their credit scores and bank accounts. They are widely accessible and affordable for low- to mid-income borrowers who have limited funds for a down payment. FHA Loans allow as little as 3.5% down payment on a mortgage.
An FHA Loan is often the easiest home loan to qualify for.
Do I qualify for an FHA Loan?
The first requirement of an FHA Loan is a minimum FICO credit score of 580. This qualifies you for the 3.5% down payment.
If your FICO credit score is between 500 and 579, the minimum down payment is 10%.
While FHA Loans accept lower credit scores and grant lower down payments, other stringent requirements may apply.
Below is a list of requirements set by the Federal Housing Authority.
FHA Loan requirements 2019:
- Your credit score must be at least 580 and you must put at least 3.5% down.
- If your credit score is between 500 and 579, a 10% down payment is required.
- The minimum down payment must come from your savings account, a grant or have been gifted to you from a family member or employer.
- You must provide proof of employment. You must have a history of two years employment. Schooling can sometimes replace work history. Furthermore, if the job industry or position changes, then additional conditions may apply.
- You must have a valid Social Security number.
- You must be a lawful U.S. resident.
- You must be of legal age in your state of residency to sign a mortgage.
- The home you are buying must be used for your primary residence.
- If your credit score is above 580, you must have a total debt-to-income ratio of less than 57%, or a mortgage debt-to-income ratio of less than 47%.
- The property must have been appraised by an FHA-approved appraiser.
Typically, FHA-approved lenders determine credit-worthiness on a case-by-case basis.
How do FHA Loans work?
A lender must be approved by the Federal Housing Authority to help you get an FHA Loan. Secure Choice Lending is approved to help.
It is the FHA-approved lender who lends you the money, not the FHA. The FHA is the one who guarantees the loan, and you pay for that guarantee through Mortgage Insurance Premium, or MIP, payments. Lenders bear less risk because, when you stop paying your mortgage, they file a claim with the FHA for payment of the remaining balance after foreclosure.
Although lenders have to follow regulations, they don’t have the same requirements. Some lenders are more strict than others about approving borrowers. There can also be differences in interest rates and loan terms.
Is it a good idea to get an FHA Loan?
If your credit score is low and/or you have limited money available for a down payment, an FHA Loan is a good way to easily get approved for a home loan.
While there are benefits to getting an FHA Loan for your home, it is important to be aware of the following drawbacks:
1) The type of property you can buy can be limited.
FHA Loan requirements state that the property you are buying must be appraised by an FHA-approved appraiser. This is because the FHA has specific guidelines and restrictions on what constitutes an FHA-approved property.
The house you covet may meet FHA requirements, but there are maximum loan amounts permitted by the FHA based on the city in which you want to set root. Due to the maximum loan amount, FHA-eligible houses are limited.
As you search for a home, make sure to look at the FHA Loan guidelines or contact a mortgage professional at Secure Choice Lending.
Know if the home you are eyeing qualifies.
2) A Mortgage Insurance Premium, or MIP, is required.
The MIP, paid by you, insures the lender in case you stop making payments on your mortgage.
FHA Loans come with two mortgage premiums:
The first is 1.75% of the base loan amount (as of 2019), paid upfront when you close. Usually, it is financed as part of the loan. This is called the Up-Front Mortgage Insurance Premium, or UFMIP.
The second is called the Annual MIP, though it is charged monthly. Also called the annual premium, it is based on the amount and length of the loan. Sometimes, depending on your situation, you pay the annual MIP for the length of your mortgage.
Despite these drawbacks, FHA Loans are the better option for people who have low credit scores and smaller savings accounts from which to draw for a down payment. In short, FHA Loans give people a chance at owning their very own home despite their financial situation.
Which is a better loan: FHA or conventional?
Conventional mortgages are not insured by the FHA, and because lenders bear a greater risk when people stop making payments, they have stricter qualification criteria.
A low credit score will make it difficult, though not impossible, to qualify for a conventional loan.
Knowing the differences between an FHA Loan and a conventional loan is a must when embarking on the home buying process.
Below are several major differences between the two:
- When you have a low credit score — Lenders often require credit scores of at least 640 to qualify you for a conventional loan. You can qualify for an FHA Loan, however, with a credit score as low as 500.
- Different down payment requirements — Most conventional lenders require a down payment of at least 5%. You can get an FHA Loan with a down payment as low as 3.5%.
- Different mortgage insurance requirements — Conventional lenders require private mortgage insurance, paid monthly, if your down payment is less than 20%. FHA Loans require an upfront mortgage insurance premium and an annual mortgage insurance premium, paid monthly. Additionally, FHA Loans usually require you to pay for insurance longer than conventional loans.
- Interest rates — FHA Loans typically have lower interest rates compared to conventional loans. This means your loan will cost less over time.
The question of which loan is better depends on your situation.
But keep in mind, if you have a low credit score or have precious little money for a down payment, you might not even qualify for a conventional loan.
What are the different types of FHA Loans?
The following are some of the FHA’s most popular single-family loan types as described on the Department of Housing and Urban Development, or HUD, website:
- Adjustable Rate Mortgages (ARM) — Unlike fixed-rate mortgages that have the same interest rate for the life of the loan, the interest rate on an ARM changes over time. While the initial interest rate on an ARM is lower than that of a fixed-rate mortgage, it will increase and decrease periodically. This type of loan is ideal if you plan on owning your home for only a few years.
- Basic Home Mortgage Loan 203(b) — The most popular FHA home loan works well for first-time home buyers because they can be eligible for approximately 96.5% financing of their loan, which helps lower the down payment and minimize closing costs. The 203(b) home loan is the only one permitting 100% of closing costs to come from family, a non-profit or a government agency as a gift.
- Condominium Mortgages — Sometimes called “condo loans,” FHA Condominium Loans are specific to the purchase of housing units in a condominium complex. The condominium project must be FHA-approved.
- Home Equity Conversion Mortgage (HECM) for Seniors — Also called the FHA Reverse Mortgage, this loan enables homeowners ages 62 and older to withdraw a portion of their equity.
- Indian Reservations and Other Restricted Lands (248) — The Section 248 program is designed for those who want to purchase a home on Indian Reservations and other restricted lands. This program works with tribe members’ active participation because the FHA will only insure loans on the reservation if tribe members are satisfied with the transaction.
- Rehabilitation Mortgage 203(k) — The Section 203(k) program allows homeowners or buyers to finance both the purchase or refinancing of a house and the cost of its rehabilitation through a single mortgage. It also enables them to finance the rehabilitation of their existing home.
- Streamline Refinance — This FHA mortgage refers to the refinancing of an existing FHA-insured loan.
How do I apply for an FHA Loan?
When applying for an FHA Loan, Secure Choice Lending is required to follow FHA regulations and guidelines. The approval process is different for every borrower and greatly depends on your credit score and the size of your down payment.
The first step is to contact Secure Choice Lending and ask to speak with a mortgage professional.
A loan officer will then help you begin the application process, which requires some financial information for qualifying purposes.
Secure Choice Lending can assist you with an FHA Loan
We are happy to answer all your questions about FHA Loans.
Call us at (951) 707-9364.
Unsure if you qualify for an FHA Loan?
Call us and we will help you find out.
Confused by the FHA Loan requirements?
We can explain each one and help you obtain them.
Overwhelmed because you don’t know if an FHA Loan is a good idea for your situation?
We can help.
Want to know whether an FHA loan or a conventional loan suits your needs?
Call us and we will guide you through your options.
Remember, FHA home loans are widely accessible and affordable. With as little as 3.5% down needed to close, they provide the freedom to put money toward personalizing your dream homes.
Secure Choice Lending is a full-service mortgage broker that will secure you a mortgage that doesn’t break the bank.
To streamline the lending experience, our team of financial experts matches consumer needs with the appropriate loan programs and level of risk. With loan officers versed in all mortgage types, solutions to your home-buying questions are a phone call away.