6 Important Facts You Need To Know About FHA Loan Requirements
FHA Loan Requirements
First-time home buyers and repeat home buyers can use the program to purchase almost any type of residence since they meet FHA loan requirements. Six important facts you need to know about FHA loan requirements. NSH Mortgage has the knowledge and tools that can help you with keeping up to date on your FHA loan requirements and assist you in making the right decisions.
Those include a minimum credit score of 500 with 10% down, and 580 for loans with 3.5% down. The property must be your primary home, no vacation cabins or rentals. However, you can buy a multi-unit property, like a duplex, since you live in one of the units.
FHA Loan Guidelines Versus Conventional Guidelines
Conventional means a mortgage that is not backed by the government. You can buy a house without putting 20% down, even if your credit’s not perfect, and there are both private loans and government backed options to fit the bill. However, conventional loans tend to have more restrictive guidelines.
Low to no down payment loans are readily available from U.S. lenders, and borrowers can be approved with even below average credit scores. The FHA loan is one of the most popular low down payment mortgages among borrowers with less than perfect credit. The Federal Housing Administration backs the program and makes it available through nearly every mortgage lender in the country. If you want to use FHA financing, you apply with a mortgage lender, broker or bank, just like you would for any other loan type.
For years, the FHA has advertised its products as loans for consumers on the margins of home-ownership; those with less than perfect credit scores, with elevated debt to income ratios, or with a lack of credit history. This does not mean that the FHA program is limited to first-time home buyers, though, or to people who otherwise cannot get financed. The FHA program has evolved since its 1934 inception. Today, FHA loans are among the most flexible and rewarding home loan products available to U.S. buyers.
Six FHA Mortgage Facts You Might Not Know
Fact 1: The FHA Is Not A Mortgage Lender
The FHA is not a mortgage lender. It is a mortgage insurer. The acronym FHA stands for Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development.
The FHA does not make mortgage loans to home buyers or refinancing households. Rather, the FHA provides mortgage insurance to banks, credit unions and other lenders which make loans meeting FHA insurance standards. The FHA reimburses lenders for a portion of incurred losses if their FHA insured loans default, or go to short sale or foreclosure.
Fact 2: FHA Loans Are Not Just For First-time Buyers
FHA loans are not for first-time buyers only. First-time and repeat buyers can finance all their homes with FHA mortgages. The FHA loan is often marketed as a product for first-time buyers because of its low down payment requirements. However, in the last decade, many U.S. homeowners have lost home equity in the housing market downturn.
These repeat buyers may have little money for their down payment, even after the sale of their former home. The FHA will insure mortgages for any primary residence. There is no requirement that you must be a first-time buyer to use the FHA loan program.
Fact 3: FHA Loans Require Just 3.5% Down
FHA loans do not require a 20% down payment. For most buyers, FHA mortgages require a 3.5% down payment. This makes the FHA mortgage one of the most lenient mortgage types available nationwide.
There are very few credit restrictions on the FHA loan, and the agency allows your 3.5% down payment to comes as a gift from a family member, employer, charitable organization or government homebuyer program. Other low down payment mortgage programs have the eligibility requirements. Many are limited to those with low, very low, or moderate income. Or they are available to only certain groups. First-time buyer’s guide: making a down payment.
The VA loan, for example, allows 100% financing, but you must be an eligible military borrower to use it. The USDA Rural Development loan also allows 100% financing. In addition, the program requires you to buy in a designated rural area and imposes income limits too.
Fact 4: FHA Loans Allow Low Credit Scores
FHA loans feature some of the most flexible and forgiving credit standards of any available loan type. With a FHA backed loan, you do not need perfect credit. In fact, the FHA expressly instructs lenders to consider a borrower’s complete credit history, not just isolated instances of bad financial luck or an occasional late payment.
FHA mortgage rates are often lower than those of conventional loans for people in the same credit bucket. That is because FHA does not add risk based surcharges for things like lower credit scores, higher loan to value ratios, or condos and manufactured homes. Which credit score do you need for a mortgage.
Note that not everyone can qualify for a FHA home loan. Borrowers with a banged up history, though, have a much better chance of getting loan approval through the FHA than other government agencies. Even if you have been turned down for other types of credit, such as an auto loan, credit card or other home loan program, a FHA backed loan may open the door to home-ownership for you.
Fact 5: FHA Loans Are Not Expensive
FHA loans can be more expensive, or less expensive, than other loan types. The long term cost of a FHA loan depends on your loan size, your down payment and your location. The biggest cost of a FHA home loan is usually not its mortgage rate, FHA mortgage rates are often lower than comparable conventional mortgage rates through Fannie Mae and Freddie Mac. The biggest cost is the FHA mortgage insurance.
FHA mortgage insurance premiums (MIP) are payments made to the FHA to insure your loan against default. MIP is how the FHA collects dues to keep its program available to U.S homeowners at no cost to taxpayers.
You pay MIP in two parts. The first part is paid at closing and is known as Upfront MIP. You can pay this out of pocket, have a motivated home seller pay it for you, or wrap it into your new loan balance. It is up to you.
The mortgage lender calculates FHA annual mortgage insurance premiums each year, based on your remaining loan balance, and divides that amount by 12 and adds it to your mortgage payment. Annual MIP can range as high as 1.10% for high cost homes in areas such as Orange County, California; Potomac, Maryland; and, New York City, New York. For most borrowers, though, MIP is between 0.45% and 0.85%. Depending on your loan term, 15 years or 30 years, and the loan to value, putting less than 10% down. Whereas, your (MIP) is higher. Keep in mind that unlike conventional mortgages, FHA MIP does not drop off once you have paid your loan to down to 80% or 78%. It remains in force while you have your mortgage.
Fact 6: You Can Re-apply For FHA Loans If You Have Been Turned Down
All FHA loans are not the same. There are many types of FHA loans, and mortgage rates vary by lender. As an agency, the FHA publishes and maintains minimum eligibility requirements of all the loans it offers. However, FHA lenders enforce additional requirements on FHA loans, known as investor overlays.
A sample of investor overlays include raising the minimum FHA mortgage score requirement, requiring additional time since a bankruptcy, short sale, or foreclosure, or requiring employment verification for a FHA Streamline Refinance transaction. Because of overlays, when you have been turned down for a FHA mortgage by Lender A, you should always try to apply with Lender B which may approve your FHA loan request. Plus, mortgage rates can be very different from bank to bank. In addition, the FHA offers special refinance loans, home construction loans, and other benefits to its applicants. If you have been turned down for a FHA loan with your lender, consider applying somewhere else. Your loan may be approved once you re-apply.