FHA Requirements and Guidance (podcast)

FHA Loan Program ‘Amazing’ For First-Time Home Buyers

If you are looking to buy your first home, an FHA loan can help you do that. These loans tend to be easier to obtain than conventional finance, and they also offer low down payments.

Mortgage consultant Ivan Simental recently took a look at this “incredible loan program,” as he puts it, in an episode of The Mortgage Reports podcast.

Are you considering an FHA loan for your home purchase? Here’s what you need to know:

Check your eligibility for the FHA loan. Start here (December 27, 2021)

Listen to Ivan on the Mortgage Reports Podcast!

Conditions for obtaining an FHA loan

If you want to buy a home or refinance with an FHA loan, you will need to meet some basic requirements set by the Federal Housing Administration. Keep in mind that these are basic FHA requirements and in practice the rules may vary from mortgage lender to mortgage lender:

  • 580 minimum credit score in most cases
  • 3.5% minimum deposit
  • Debt-to-income ratio less than 50%
  • Two-year stable income and employment history

Your mortgage lender will verify your eligibility when you apply by verifying documents (like bank statements and tax returns) and extracting your credit score and credit reports.

The home you buy must also meet FHA requirements.

The FHA allows financing of 1, 2, 3, and 4-unit homes, provided the borrower uses the property as their primary residence. In addition, the house must meet basic safety and habitability standards. And your loan amount must be within the local FHA loan limits.

Check your eligibility for the FHA loan. Start here (December 27, 2021)

Credit score matters for FHA loans

With FHA loans, there are different ranges of credit score. Which bracket you fall into will determine your down payment, interest rate, and whether you qualify for an FHA loan.

Here is how these parentheses are distributed:

  • 500 to 579: You will need a 10% down payment and can expect the highest interest rates
  • 580 to 639: You will need a deposit of 3.5%. If you have at least a 620, you will get much better interest rates than the previous installment
  • 640 to 679: You will need a 3.5% down payment, and as Simental says, “You will get much better interest rates, and the financing terms are just much more favorable.”
  • 680 and more: You will need a 3.5% deposit and should consider a classic loan instead

“A 680 is where you really, really want to start taking a look at conventional financing,” says Simental.

“I wouldn’t want you to stay on an FHA loan for the duration of your loan. If you have a FICO score of 680 or higher, definitely ask your lender if you can qualify for conventional financing just because it’s a better program for you overall.

Options for FHA down payment and closing cost assistance

Worried about covering that down payment? There are many options with FHA loans.

On the one hand, you can use a down payment assistance program. These are often offered through national and local housing agencies or non-profit organizations and may cover some or even all of your down payment and closing costs.

You can also:

  • Get help from a family member. Just note that the aid must be a real gift – not a loan – and be properly documented
  • Ask your real estate agent to contribute. FHA allows realtors to contribute all or part of their commission towards a buyer’s down payment or closing costs
  • Use loans from lenders. This means that the lender covers some or all of your costs. In exchange, you usually pay a slightly higher interest rate.

If you go for the latter, you would take a higher interest rate and then the lender would contribute money towards your closing costs. As Simental explains, “Yes, your payment will go up a bit, but you have to come with no money out of your pocket. “

Buyers should plan to refinance into a conventional loan in a few years if they choose this route. This will allow them to get out of that higher payment and lower their interest rate.

Also note that the FHA is not the only type of home loan that offers down payment assistance. You can use gift money, lender credits, and / or seller credits with just about any mortgage program. For more information, learn about closing costs and how to reduce them.

Get matched with a mortgage. Start here (December 27, 2021)

Expect mortgage insurance

All FHA loans require mortgage insurance, which protects the lender in the event of default on the loan. The exact amount of insurance you will pay depends on your down payment, the length of the loan, and the amount of the loan. But each year it usually varies between 0.45% and 1.05% of your loan balance. Your premiums are spread over the year and added to your monthly mortgage payment.

There is also an initial mortgage insurance premium fee charged by the FHA. This equates to 1.75% of the loan amount, but most borrowers do not pay it upfront. Instead, they factor it into their loan balance.

In some cases, you may be able to cancel your mortgage insurance after 11 years; in others, it may be permanent for the life of the loan.

“If you put more than 10% less, your mortgage insurance will drop after 11 years,” Simental says. For those with a smaller down payment, “you will need to refinance into a conventional product once you have earned the 20% equity in your home. “

If you are using Social Security or Disability income to qualify for your FHA loan, there is a good benefit. According to Simental, these salaries are “increased” – or rounded – by 25%. So if you receive $ 1,000 in payments, that will be grossed up by $ 1,250 instead.

“It’s pretty cool because it gives you that extra income for qualifying purposes,” Simental says.

DACA recipients are also eligible

As of January 19 of this year, recipients of the DACA program are now eligible for FHA funding like any other U.S. citizen. Before that, DACA home buyers could only use conventional loans, which are much more difficult to obtain.

“That makes it really great for people who are recipients of DACA,” Simental says. “They can take advantage of FHA financing with lower FICO scores and still be able to access homeownership.”

Using an FHA Loan? Also have a long term plan

According to Simental, FHA loans should be viewed as a “bridging loan” – a stepping stone to conventional financing, which is much more affordable and may have lower rates.

For this reason, it is important that FHA borrowers have a plan of action.

“You should come up with a two, three, or four year plan to get out of that FHA loan and switch to a conventional product,” Simental explains.

If you are unsure of how to proceed, talk to your loan officer before finalizing your loan application. You will want to be sure that there is a clear path to get out of your FHA loan and get a more affordable conventional mortgage.

Get more help with FHA loans

Want to learn more about how to qualify for an FHA loan? Need advice or support in financing? Contact a mortgage broker, loan officer, or financial advisor for help. They can point you in the right direction for your unique goals and budget.

Show me today’s rates (December 27, 2021)

The information on The Mortgage Reports website is provided for informational purposes only and does not constitute an advertisement for any products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, its parent company or its affiliates.

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