Many potential homebuyers have questions about an FHA insured mortgage loan and what is needed to qualify. We will go ahead and break it all down for you. FHA is an acronym that stands for Federal Housing Administration. The administration was founded by the United States Federal government in 1934. The main purpose of the FHA was to allow people with sufficient income to purchase a home without the need for a major down payment. Many people think by obtaining an FHA loan that they will receive a loan directly from the FHA office. This is not the case. FHA sets forth a set of qualifications about home loans that they insure. The FHA insures qualified mortgage loans that protect the lender in the event that the borrower is not able to make the payments and the home is foreclosed on. Lenders that are qualified to offer an FHA insured loan must adhere to all the regulations set by the FHA. ( Some lenders will add in their own mortgage overlays as well). Many lenders offer FHA insured loans that require low down payments. In order for the FHA to insure the loans, there must be a source of funds to pay to the lenders in the event of a foreclosure. These funds come from Mortgage Insurance. When a borrower is approved for an FHA mortgage, they are asked to pay an upfront mortgage insurance premium (UFMIP) as well as a monthly mortgage payment. The current upfront amount is 1.75% of the loan amount. The upfront portion is typically financed into the overall mortgage amount to save borrowers from paying out of pocket. The amount paid monthly is determined by the loan to value ratio.
FHA will allow borrowers a variety of loan types. Fixed loans ranging from 10 to 30 years are the most common type of mortgages. Borrowers may also choose an adjustable rate option. This means that the interest rate on the loan will be fixed for a certain time such as, 1 year, 3 years, or 5 years. After the fixed period ends, the rate on the loan may go up or down each year depending on the current market. FHA loans do not require a penalty if a borrower pays the mortgage off early. It is also possible for a borrower to sell their home to another qualified borrower and allow the second borrower to assume the existing mortgage. The prevailing rates for FHA loans are often or sometimes lower than rates for a conforming home loan. Mortgage lenders that have access to both types of loans can provide a comparison of the both. FHA loans are designed for owner occupied property. Therefore, people are not allowed to use the FHA program to purchase a rental property. People that have an FHA mortgage are required to move into the home no later than 60 days after they sign all of the loan closing documents.
The Primary FHA loan requirements are:
- Average credit score - Typically people that have credit scores too low for a conventional mortgage often qualify for an FHA loan.
- Steady source of income- Need to show that they have worked at the same place of employment for at least 2 years. (exceptions to 2 years can be made) Can be proven by W-2's, paystubs, tax returns.
- Debt to income ratios within accepted limits- Front end ratio of no more than 31% ( monthly mortgage payment divided by monthly income) Back end ratio of no more than 43% ( monthly mortgage payment plus monthly obligations divided by monthly income)
Down Payment of 3.5% of the home purchase price- FHA guidelines state that a qualified borrower must have proof of a documented source of the down payment such as a savings account, certificate of deposit, money market account or retirement. The down payment may also come from the gift of a relative.
The FHA will also allow a non- occupying co-signer. This can be beneficial to people whom don't meet all of the criteria for the FHA guidelines. The co-signer will be subjected to the same qualification process. They will need to meet all of the guidelines. The FHA will also allow the seller of a home to pay the closing costs from the proceeds of the sale. A maximum of 6% of the sales price can be used to cover the prepaid items, closing items, and the mortgage insurance. It is possible to use an FHA loan to purchase a condo unit. However, the entire condo project must first be approved by HUD, the regulator of FHA.
For home buyers purchasing a home in need of repair there is the FHA 203K loan. This type of loan allows borrows to receive money above and beyond the sales price. This extra money is then used for the home repairs. The extra money is combined with the purchase loan. This means that the borrower will only have to pay one interest and mortgage rate for the entire loan amount. For people that are at least 62 years of age can tap into their homes equity. This is called a reverse mortgage but the official name is the FHA Home Equity Conversion mortgage. As long as the borrower has an extremely small existing mortgage or no mortgage, they can qualify for the loan. They will also have to meet all qualifications and guidelines set forth by the FHA. The idea of the reverse mortgage is to help qualifying homeowners with a monthly check for a pre-determined number of years that they can use for anything that they deem necessary. As long as the borrower lives in the home as their primary residence, they will not have to repay the loan. The loan must be repaid when the borrower moves out of the property or passes away. This program has been a benefit to many senior citizens.
For more information on our first time homebuyer program, give us a call today. A licensed real estate professional can help council you through the path to home ownership today.