What Should You Know About The FHA Loan?
The FHA loan is a mortgage that is government-backed and is issued by the FHA (Federal Housing Administration). It is very popular among the first-time homebuyers and requires only minimum credit score or down payments when compared to conventional loans. The government is actively insuring the loan but it is mortgage lenders that are FHA-approved that offer it. The regular terms for the FHA loan are 15 and 30 years.
FHA Loans – How Do They Work?
The flexible underwriting standards of the FHA allow the borrower that has a low income and bad credit score to still become a homeowner. The only real catch is that FHA mortgage insurance needs to be paid. This is what covers the lender from losses appearing due to loan defaults. Usually, this extra requirement is mandatory if under 20% of the home value is put down.
All the FHA loans require borrowers to pay 2 insurance premiums:
- Upfront premium – 1.75% of the full loan amount. This needs to be paid when the loan is obtained and can be rolled into a financed loan amount.
- Annual premium – Between 0.45% and 1.05%, based on the loan term. This is the initial LTV (loan-to-value) ratio and is divided so it is paid every single month.
As an example, when you borrow $100,000, the upfront premium is $1,750. The annual premium ranges between $450 and $1050, based on the term.
In most cases, an FHA mortgage insurance premium cannot be canceled. You can remove it only through refinancing happening through a loan that is non-FHA or when the property is sold. FHA loans are very popular among the first-time homebuyers and those that have moderate to low incomes. You can also get an FHA loan as a repeat buyer but only when what is bought is used as a primary residence.
The FHA lender can only charge up to 5% of the loan amount to cover closing costs. With the use of the FHA loan, lenders, builders, and home sellers pay up to 6% of the closing costs, like appraisal fees, title search or credit report.
Qualifying For The FHA Loan
There are some strict lending guidelines that have to be respected by the borrower to become eligible for the FHA loan:
- The FICO score needs to be between 500 and 579 when a 10% down payment applies.
- The FICO score needs to be higher than 580 when the down payment percentage is 3.5.
- A verifiable employment history that covers at least the past 2 years.
- The loan is used in order to buy a primary residence.
- Income can be verified through federal tax returns, bank statements and pay stubs.
- An FHA-approved appraiser appraises the property (HUD property guidelines need to be met).
- Front-end debt ratio cannot exceed 31% of the monthly gross income.
- Back-end debt ratio cannot exceed 43% of the gross monthly income.
- When bankruptcy happened, you have to wait 1 to 2 years when applying.
- When a foreclosure happened, the waiting period is 3 years.
FHA Loan Types
The FHA insures different loan programs that are offered by the private lenders, not just the very popular FHA loan. All of these are great options for homebuyers and can be considered:
- FHA 203(k) Loans – These help to buy and renovate a home. A single mortgage is used and the program can be utilized to refinance existing mortgages. There are two options available, in the limited and the standard 203(k) loans.
- HECM (Home Equity Conversion Mortgage) – HECMs are very popular as they are reverse mortgage types that are insured by the FHA. Older homeowners that are over 62 years old and that have enough equity can use them, just like people that own a home and want to withdraw a part of its equity. The withdrawal amount varies and depends on different things.
- FHA EEM (Energy Efficient Mortgage) Program – When backed by the FHA, these mortgages allow the homebuyer to buy a property that is energy efficient. Alternatively, the loan can be used to remodel and buy older homes so that they become energy efficient.
- FHA Section 245(a) Loan – This loan is known as Graduated Payment Mortgage and is aimed at people that have an income that gradually increases. You thus start with a small monthly payment that will eventually go up. At the moment, there are 5 specific plans that are available, with payments that increase every single year between 2.5% and 7.5%.
Finding FHA Lenders
The borrower receives the home loan from an FHA-approved lender, not the FHA directly. The FHA only directly insures the loan. This is why different FHA-approved lenders have varying costs and rates, which applies even for the same exact loan.
You can get your FHA loans from many possible sources, ranging from very large banks to independent mortgage lenders. Services, underwriting standards, and costs all vary among mortgage brokers or lenders. This is why you need to always shop around so you find the best possible deal.
2020 FHA Loan Limits
In most parts of the US, the FHA loan floor limit for 2020 is $331,760. This is higher than in 2019 when the limit was $314,827. In the higher-cost areas, the top amount is $765,600. These are limits that are known in the industry as floors and ceilings. They mark how much the FHA is willing to insure. The limits are updated by the FHA every single year, all based on the changing home prices.
The law states that the FHA has to adjust amounts based on loan limits that are set by the FHFA (Federal Housing Finance Agency) for all conventional mortgages that are owned by or guaranteed by Freddie Mac and Fannie Mac. Floor and ceiling limits always vary based on living costs in specific areas. They can also be very different from one county to another. The areas that have really high living costs have very high limits. The opposite also applies. Some special exceptions apply for housing in Hawaii, the Virgin Islands, Guam, and Alaska. This is because home construction is much more expensive there.