Before buying your new home, you should really check resources like our FHA Mortgage Guide first. Houses are expensive to buy and maintain, so you must carefully deliberate purchasing one.
Thankfully, the Federal Housing Association can help you by providing affordable home loans. FHA mortgages come in many varieties, so you might just find one for your new home!
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What is an FHA Mortgage?
If you’re a first-time home buyer, the Federal Housing Association provides loans to help your home purchase. It provides FHA mortgages through accredited mortgage lenders, so some call them “FHA-insured mortgages.”
Compared to conventional mortgages, these have more lenient requirements for new homeowners.
More importantly, FHA loans even come in a variety of options to suit their borrowers’ needs.
Types of FHA Mortgages
The Federal Housing Association has five types of loans that are geared for specific homeowner needs.
The FHA has the Traditional Mortgage providing single-family homes and other affordable housing options.
To further help homeowners, there are FHA Energy Efficient Mortgages that may lower their utility bills. These are used to make homes energy-efficient, thus spending less on electricity and water.
The FHA could also help you renovate your home with their 203(k) Improvement Loans. Whether your humble abode needs fixing or sprucing up, this loan can give you the extra cash necessary.
Eventually, your income may increase, so you can take out a Section 245(a) Loan with lower initial monthly payments.
Once you’ve hit the age of 62, you could borrow funds using the FHA’s Home Equity Conversion Mortgage.
Who Qualifies for an FHA Mortgage?
Most people struggling with their finances are eligible for FHA home loans.
In fact, it was created years ago to help Americans afford their own homes. That’s why they have more lenient requirements compared to conventional private mortgages.
The FHA even requires primary residence within a year for borrowers, so they won’t be used as investment options instead.
How To Increase Likelihood of FHA Mortgage Approval
If you’re worried about your eligibility for FHA mortgages, you can take certain measures to increase your chances of approval. Although, bear in mind that these won’t guarantee a successful home loan application.
First, you must practice sound personal finance before your application. Delay expensive purchases, and always fill-out gift paperwork before receiving money as presents.
It’s best to only have one bank account and to document every instance you’ve deposited funds. If you have more accounts, refrain from transferring big amounts and keep them in one account as much as possible.
Second, you must maintain a healthy credit score by having a good payment history and credit utilization. Always submit your payments on time, even the ones you’re currently disputing.
Moreover, refrain from getting new credit cards regardless of their new enticing promos. These can alter your credit utilization and eventually decrease your credit rating.
Third, you should be mindful of your career moves as those are assessed by lenders as well.
The goal is to convince lenders that you can handle responsibility. This means sticking with your current job, so you must not quit or switch careers as much as possible.
If you have a salaried position, exchanging it for a heavily-commissioned alternative may affect your loan paperwork.
FHA Loan Requirements
For FHA loan requirements, you must have a valid Social Security number, US citizenship, and be of legal age.
The association will also check your work history within the past couple of years. You can submit this info using your tax return records and balance sheets, especially if you’re self-employed.
Of course, FHA loans must only be procured from FHA-approved lenders and used on qualified housing options.
FHA loans are payable for 15 years or 30 years. On the other hand, conventional loans have 10-, 15-, 20-, and even 30-year repayment options.
Federal home loans charge an upfront mortgage insurance premium (MIP), which is 1.75% of their base amounts. You’ll also have to pay an annual MIP worth approximately 0.45% to 1.05%.
In contrast, conventional mortgages charge 0.5% to 1% for private mortgage insurance annually. If you can pay at least a 20% down payment, you could do away with the insurance.
Lenders include mortgage insurance in order to protect against loan risks. They see particularly high risk with FHA loans, so they always require insurance.
FHA lenders also check for a borrower’s debt-to-income (DTI) ratio to determine FHA loan limits.
It’s classified into two categories: front-end and back-end. The former compares your monthly home spending with your salary. The home expenditures include loans, property tax, insurance, and homeowner fees.
Meanwhile, your monthly unpaid balances divided by your pre-tax monthly income constitutes back-end DTI. Those monthly debts encompass your housing expenses and other monthly payments.
You must keep these ratios as low as possible in order to better qualify for FHA mortgages. In fact, the FHA tightened loan standards in 2019 as their portfolios are posing excessive risks.
FHA mortgages usually require just a measly 500 credit score, unlike the minimum 620 score requirement for conventional mortgages. Around this rating, you’ll have to allot around 10% for a downpayment.
In contrast, you could give 3.5% instead with a credit score of 580 and above. Take note that FHA loan providers might have different loan terms and conditions.
People may still qualify for an FHA mortgage without FICO scores. Lenders can assess nontraditional credit factors, such as payments for student loans and rent.
Also, it’s best to build at least a year’s record of diligent payments prior to your mortgage application.
Remember, lenders are not allowed to reject your application just because you chose not to use your past credit.
Current FHA Mortgage Rates
As of September 2020, the FHA charges a 2.875% interest rate or a monthly payment of $1,652.00 for 15-year fixed mortgages.
Meanwhile, 30-year FHA mortgages charge approximately 2.750% interest rate or $985.00 every month.
FHA loan providers have distinct requirements though, so these numbers may not reflect their offers. Check all available loan providers, so you can judge which one adequately suits your needs.
What are the Benefits of FHA Mortgage?
The benefits of FHA mortgages favor those struggling with their finances, so they have especially lenient requirements for borrowers.
As we’ve mentioned, they require lower credit scores and down payments than conventional mortgages. With extra cash for one month and a 43% debt-income ratio, you can still get an FHA home loan.
What’s more, the Federal Housing Association allows sellers to contribute up to 6% to the loan amount. They might shoulder some of your home purchase costs, helping you acquire a home faster.
If you decide to sell your home, you’ll be glad to know that Federal Housing loans are assumable. This means you can pass on your FHA mortgage to your home’s new owner.
How Much is FHA Mortgage Insurance?
Federal housing loans charge 1.75% for upfront mortgage insurance and 0.45%-1.05% for annual insurance.
Mortgage insurance costs depend on multiple factors though, such as credit score and income. Moreover, FHA loan providers all have different requirements.
It’s best to check all possible FHA loan options and their terms and conditions. You could cancel your annual MIP under certain conditions.
Your loan and your insurance should have been issued before June 3, 2013, and they must drop below a certain threshold.
You may cancel a 30-year mortgage after paying for five years and reducing it to 78% of the home purchase price. In contrast, a 15-year mortgage from that date doesn’t require a minimum payment duration.
Things To Consider With FHA Mortgages
Federal housing loans aren’t all peachy, as they share their own set of drawbacks too.
FHA loans are significantly lower than other loan options, limiting your home purchase options. In 2015, FHA loans covered only $271,050 in most of the United States. You’d be better off using these in low-cost neighborhoods as a result.
FHA loans also require minimum property standards that are enforced by FHA appraisers. They ensure that borrowers use their loans for homes that provide acceptable living conditions.
If your appraiser is particularly strict, you might find it difficult to get approved for an FHA mortgage. You might want to find alternatives if your chosen property needs repairs.
Finally, the biggest concern with Federal Housing loans is their humongous mortgage insurance.
You may end up paying 80% of your mortgage due to the insurance requirement.
Nevertheless, FHA mortgages can still help home buyers with low income to buy houses. You just have to search for all available options and fully understand their terms and conditions.
You should check for recent updates to the government’s home loan options.
For example, the Coronavirus Aid, Relief, and Economic Security (CARES) Act assists homeowners in light of the recent COVID-19 pandemic.
It protects them against foreclosure from March 18, 2020, until December 31, 2020. Furthermore, FHA mortgage holders can request 180-day forbearance for home loan payments.
FHA Mortgage FAQs
How to get an FHA mortgage loan?
You can get an FHA mortgage from approved lenders nationwide. Check the Federal Housing Association’s website for more information.
Is FHA loan bad?
All home loans have their advantages and disadvantages, including FHA loans. You should plan your home purchase carefully by deliberating all terms and conditions.
Where do I apply for an FHA loan?
You can visit your local FHA-approved lender for their mortgage options. On the other hand, there are online options for FHA loans.
What is the income limit for an FHA loan?
Your income must net at least a 43% income-to-debt ratio, so you can qualify for FHA mortgages. The income requirement differs depending on your home loan provider.
Do you have to pay closing costs with an FHA loan?
You must pay closing costs when getting an FHA mortgage. These will depend on the lender you’ve selected and on your personal finances.