Your dreams of homeownership can come true with an FHA loan and help from the experts at Homestead Financial Mortgage. As a direct lender, we’re the ones who decide on your loan, and we’ll help you every step of the way.
Important Facts About FHA Loans
If you’re looking to purchase, refinance, or even buy a home that needs some renovations, FHA loans could be the perfect option. Read on to find out how these government insured loans are different, and why borrowers who thought they’d always have to be renters instead of homeowners can get approved for a loan.
What’s a FHA Loan?
An FHA loan is insured by the Federal Housing Administration and is specifically for your primary residence, not investment properties, vacation, or second home. There are several significant advantages to this type of loan, which makes them extremely appealing to borrowers. We’ll also address a few of the disadvantages of this loan and compare conventional loans vs. FHA. The credit guidelines are more lenient than conventional loans. Your income can be lower, you can have more debt, and you only have to put down 3.5%. Let’s look at some of the requirements.
FHA Loan Requirements
The requirements for an FHA loan are pretty straight forward.
- Primary residence - as we talked about above, you need to live in the home as your primary residence. The reason for this is that FHA loans have some of the lowest interest rates available, and the government wants to help families get into a home (not buy a vacation home or build their investment portfolio).
- Multi-Units - although you can't purchase an investment property with an FHA loan, you can still buy a duplex, triplex, or fourplex as long as you live in one of the units full-time. That's because the FHA still considers it your primary residence even though you're renting out the other unit or units.
- Private mortgage insurance (PMI) - all FHA loans require coverage to "protect the lender" in case of default. It's different from your homeowner's insurance. The PMI will remain for the life of the loan and is included in your mortgage payment. The amount varies depending upon your loan size.
- When comparing an FHA loan to a conventional loan, compare the payment, including the PMI. And remember, with a conventional loan, you can remove private mortgage insurance once you have enough equity. With FHA, you can't.
- FHA Loan Limits by State and County - There are different limits on how much you can borrow with an FHA loan. These limits vary depending on the median home price, location, and number of units. Ask your Homestead Loan Officer to see what the limits in your area are.
- Down Payment - you only need to put down 3.5% for a down payment. That in itself is one of the most significant advantages. Not only that, the down payment can be a gift from a relative, employer, or charity. The gift funds cannot come from the seller, builder, or real estate agent. And there can be no expectation that you'll pay the gift back - it has to be a gift.
- Closing Costs - another great thing about an FHA loan is that the seller can contribute up to 6% of the sales price towards your closing costs. For example, if you find a home for $100,000 - the seller could pay up to $6,000 of the closing costs. With gifts and seller contributions, it's possible to get into a home with very little out of your pocket.
An FHA loan is much more lenient regarding credit than conventional loans, but there still are specific requirements. Here and the main ones:
- Credit Score - the minimum credit score is 500 for an FHA loan. But with a score in the low 500s, you will have to put more money down. Here's how it works:
- 500-579 score: requires 10% down. That also applies if you have no credit.
- 580+: requires only 3.5% down.
- Credit Report every borrower on the loan must have a current credit report. Your loan officer will pull your credit before submitting your loan to the underwriter. If you don’t have any credit, your loan officer can help you document your “alternative credit” to show on-time payment of rent, utilities, and cell phone bills. But in that case, you’d have to put 10% down rather than 3.5%.
- Wait Times - If you've had a bankruptcy, you'll need to wait two years after discharge, On a foreclosure, the wait time is three years.
- Default - You can’t be in default on a government loan ( student loans, mortgages, or taxes) and get an FHA loan. You’ll have to either pay the debt off or set up a payment plan.
- Collections - If you have collections (excluding medical) in excess of $2,000 - you’ll need to pay them off before closing on your loan.
You’ll need to provide proof of steady employment and list your employment history for the last two-years. If there are any gaps in employment, you’ll need to explain them. For example, if you were in the military or school, you’ll just have to provide documentation. FHA sources of income can come from a job, self-employment, child support & alimony, social security, or retirement.
Your underwriter will confirm that you make enough money to pay for your current debts and your new mortgage payment. The way they do that is to compare your obligations to your income. The primary debts they'll look at are the ones listed on your credit report along with your housing expenses.
Once you figure out the monthly amount for your debts, compare that to your gross income. That is the debt-to-income ratio (DTI) the underwriter reviews. Generally, this ratio needs to be below 43%. Sometimes, they might go higher. Your loan originator can go over that with you. Here's an example:
Debts - $2,000
Income - $6,000
DTI = 33.33%
The main property requirements for an FHA loan is that it has to be safe and secure. When an appraiser goes out to look at the property, looking for anything that would make the house unsafe to live in. They’re also looking for any repairs that would need to be completed before closing. The house doesn’t have to be perfect. In fact, it can be ugly. It just can’t be unsafe.
If you find a home that’s in generally good condition but needs a new roof or HVAC system, check out a 203K. With this loan, you can purchase a home that needs repairs and wrap the renovation costs into the mortgage. You can also use a 203K to refinance your current home and include upgrades.
FHA’s more strict property guidelines are one disadvantage as compared to a conventional loan. Some properties just won’t pass. But often, the seller’s real estate agent will know if the house will be OK for an FHA loan. If you’re not sure, try and find out before you spend money on an appraisal.
Popular FHA Loans
Now you know why so many borrowers love FHA loans. There are so many advantages. These government loans have turned many long-time renters into proud homeowners. From low down payments to appealing rates, this type of mortgage is particularly popular with first time home buyers or borrowers recovering from credit issues.
Since Homestead Financial is a direct lender, we handle your loan from start to finish. That means we take your application, gather your documentation, present it to our in-house underwriter, close and fund your loan. There’s no middleman. Our entire team is here to help you get the loan you need. For FHA purchases and refinances, trust the professionals at Homestead Financial. Contact us today.